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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________________________________
FORM 10-Q
______________________________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _ TO _            
COMMISSION FILE NUMBER 001-38501
______________________________________________________________________________
AXCELLA HEALTH INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________
Delaware26-3321056
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
840 Memorial Drive
Cambridge, Massachusetts
(Address of principal executive offices)
02139
(Zip Code)
(857) 320-2200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common StockAXLAThe Nasdaq Global Market

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of May 7, 2020, the registrant had 23,188,816 shares of common stock, $0.001 par value per share, outstanding.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

"Clinical Study" to refer to Institutional Review Board-Approved, or IRB-Approved, clinical studies conducted in humans with our product candidates under U.S. Food and Drug Administration, or the FDA, regulations and guidance supporting research with food outside of an IND (prior to any decision to develop a product candidate as a drug product candidate under an IND or a non-drug product candidate). In these food studies, based on our understanding of FDA regulations and guidance, we evaluate in humans, including individuals with disease, a product candidate for safety, tolerability and effects on the normal structures and functions of the body. These studies are not designed or intended to evaluate a product candidate’s ability to diagnose, cure, mitigate, treat or prevent a disease as these would be evaluated in Clinical Trials if we decide to develop a product candidate as a drug or therapeutic.
This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

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

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

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

the financing needs and sufficiency of our funds to fund company operations and business plans through certain periods of time, including funding necessary to complete further development of our product candidates, and, if successful, commercialization of these candidates as drug or non-drug products;
our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates, development platform and the type of such protection;

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

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

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

regulatory developments in the United States and foreign countries;

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

our ability to secure sufficient manufacturing and supply chain capacity;

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

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

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

the potential for faults in our internal controls;

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

other risks and uncertainties, including those discussed in Part II, Item 1A, Risk Factors in this Quarterly Report.
Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events and with respect to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
We may from time to time provide estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this Quarterly Report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.
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AXCELLA HEALTH INC.
FORM 10-Q
TABLE OF CONTENTS
Page
Condensed Consolidated Statements of Operations and Comprehensive Loss

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

AXCELLA HEALTH INC.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
As of
March 31,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents$75,522  $92,053  
Prepaid expenses and other current assets1,299  1,487  
Total current assets76,821  93,540  
Property and equipment, net477  608  
Security deposits and other assets284  211  
Total assets$77,582  $94,359  
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$1,711  $1,998  
Accrued expenses and other current liabilities3,162  6,358  
Current portion of long term debt2,167    
Total current liabilities7,040  8,356  
Long term debt, net of current portion and discount22,820  24,897  
Other liabilities908  882  
Total liabilities30,768  34,135  
Commitments and contingencies    
Stockholders' equity:
Common stock, $0.001 par value; 150,000,000 shares authorized, 23,607,797 shares issued and 23,188,816 shares outstanding at both March 31, 2020 and December 31, 2019
24  24  
Additional paid-in capital277,885  276,286  
Treasury stock, 418,981 shares at cost
    
Accumulated deficit(231,095) (216,086) 
Total stockholders' equity46,814  60,224  
Total liabilities and stockholders' equity $77,582  $94,359  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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AXCELLA HEALTH INC.
Condensed Consolidated Statements of Operations
and Comprehensive Loss (Unaudited)
(in thousands, except share and per share data)
Three Months Ended
March 31,
20202019
Operating expenses:
Research and development$10,335  $7,563  
General and administrative4,125  3,468  
Total operating expenses14,460  11,031  
Loss from operations(14,460) (11,031) 
Other income (expense):
Interest income257  390  
Other income (expense)(4)   
Change in fair value of preferred stock warrant liability  (51) 
Interest expense(802) (881) 
Total other income (expense), net(549) (542) 
Net loss and comprehensive loss$(15,009) $(11,573) 
Net loss per share, basic and diluted$(0.65) $(2.43) 
Weighted average common shares outstanding, basic and diluted23,188,816  4,775,828  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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AXCELLA HEALTH INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Three Months Ended
March 31,
20202019
Cash flows from operating activities:
Net loss$(15,009) $(11,573) 
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization131  203  
Stock-based compensation expense1,599  1,137  
Change in fair value of preferred stock warrant liability  51  
Non-cash interest expense133  153  
Changes in current assets and liabilities:
Prepaid expenses and other current assets115  (844) 
Accounts payable(286) 858  
Accrued expenses and other current liabilities(3,214) (2,182) 
Net cash used in operating activities(16,531) (12,197) 
Cash flows from investing activities:
Purchases of property and equipment  (47) 
Net cash used in investing activities  (47) 
Cash flows from financing activities:
Payment of deferred offering costs  (465) 
Proceeds from exercise of common stock options  12  
Net cash used in financing activities  (453) 
Net decrease in cash and cash equivalents(16,531) (12,697) 
Cash and cash equivalents, beginning of period92,053  79,466  
Cash and cash equivalents, end of period$75,522  $66,769  
Supplemental cash flow information:
Cash paid for interest$669  $715  
Deferred offering costs included in accounts payable and accrued expenses$  $618  
Purchases of property and equipment included in accounts payable and accrued expenses$59  $  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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AXCELLA HEALTH INC.
Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited)
(in thousands, except share data)

Redeemable convertible preferred stockCommon stockTreasury stockTotal
SharesAmountSharesPar ValueAdditional paid-in capitalSharesAmountAccumulated deficit stockholders’ equity (deficit)
BALANCE - December 31, 201826,831,246  $197,842  5,193,915  $6  $7,290  418,981  $  $(157,049) $(149,753) 
Exercise of common stock options1,335  12  12  
Accretion of preferred stock to redemption value46(46) (46) 
Stock-based compensation1,137  1,137  
Net loss(11,573) (11,573) 
BALANCE - March 31, 201926,831,246  $197,888  5,195,250  $6  $8,393  418,981  $  $(168,622) $(160,223) 
BALANCE - December 31, 2019  $  23,607,797  $24  $276,286  418,981  $  $(216,086) $60,224  
Stock-based compensation1,599  1,599  
Net loss(15,009) (15,009) 
BALANCE - March 31, 2020  $  23,607,797  $24  $277,885  418,981  $  $(231,095) $46,814  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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AXCELLA HEALTH INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. NATURE OF BUSINESS
Axcella Health Inc. and subsidiaries ("Axcella," the "Company" or "we") is a biotechnology company that was incorporated in Delaware on August 27, 2008 and has a principal place of business in Cambridge, Massachusetts. The Company is focused on leveraging endogenous metabolic modulators, or EMMs, to pioneer a new approach for treating complex diseases and improving health. The Company's product candidates are comprised of multiple EMMs that are engineered in distinct combinations and ratios with the goal of simultaneously impacting multiple biological pathways.
The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, successful development of technology, obtaining additional funding, protection of proprietary technology, compliance with government regulations, risks of failure of preclinical studies, Clinical Studies and Clinical Trials, the need to obtain marketing approval for its product candidates, if required, and successfully market 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.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has historically funded its operations with proceeds from sales of preferred and common stock and borrowings under a loan and security agreement. As of March 31, 2020, the Company had an accumulated deficit of $231.1 million. The Company expects to continue to generate operating losses in the foreseeable future. The Company expects that its cash and cash equivalents at March 31, 2020 will be sufficient to fund its operations for at least the next twelve months from the date of the issuance of these interim condensed consolidated financial statements.
The COVID-19 pandemic has spread globally, including to the United States and European countries, which has resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions, business shutdowns and clinical site closures to non-essential care and clinical trials. Although we cannot presently predict the scope and severity of COVID-19, these developments and measures could materially and adversely affect our business, our results of operations and financial condition, particularly if the COVID-19 pandemic adversely impacts our ability to conduct and complete our ongoing Clinical Studies and planned Clinical Trials in a timely manner or at all. Additionally, potential shutdowns of government agencies such as the SEC or FDA, may limit our ability to raise capital and negatively impact our product development timelines.
The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the Company’s results of operations and financial position as of and for the three months ended March 31, 2020. The full extent of the future impacts of COVID-19 on our operations is uncertain. A prolonged pandemic could have a material adverse impact on financial results and business operations of the Company, including the timing and ability of the Company to complete our ongoing Clinical Studies and planned Clinical Trials and other efforts required to advance the development of our EMMs.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company's condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP").
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The Company's unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2019 and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 23, 2020 (the "2019 Annual Report"). The results for any interim period are not necessarily indicative of results for any future period.
The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments that are necessary to present fairly the Company’s financial position as of March 31, 2020, the results of its operations for the three months ended March 31, 2020 and 2019, its statement of stockholders’ equity for the three months ended March 31, 2020 and 2019 and its cash flows for the three months ended March 31, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results for the three months ended March 31, 2020 are not necessarily indicative of the results for the year ending December 31, 2020, or for any future period.

The accompanying unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the unaudited condensed consolidated financial statements. As of March 31, 2020, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the 2019 Annual Report.
Use of Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. The Company bases its estimates on historical experience, known trends and other market-specific or relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Actual results may differ from those estimates or assumptions.





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Accounting Pronouncements Issued and Not Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), as amended by various subsequently issued ASUs. The standard requires lessees to recognize an operating lease with a term greater than one year on their balance sheets as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. Lessees are required to classify leases as either finance or operating leases. If the lease is effectively a financed-purchase by the lessee, it is classified as a financing lease, otherwise it is classified as an operating lease. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which permits entities to continue applying legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year that the entity adopts the new leasing standard. The new standard will become effective for the Company on January 1, 2021. The Company will apply the transition method permitted by ASU 2018-11. The Company is evaluating the effect that adoption of the standard is expected to have on the Company’s consolidated financial statements and related disclosures and will recognize a lease obligation and right of use asset for its existing operating leases upon adoption. The Company expects to take advantage of certain available expedients by electing the transition package of practical expedients permitted within ASU 2016-02, which allows the Company to not reassess previous accounting conclusions around whether arrangements are, or contain, leases, the classification of leases, and the treatment of initial direct costs. The Company also expects to make an accounting policy election to exclude leases with an initial term of twelve months or less from the balance sheet date.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
March 31,
2020
December 31,
2019
Laboratory equipment$3,511  $3,511  
Leasehold improvements597  597  
Office and computer equipment111  111  
Furniture and fixtures122  122  
Property and equipment4,341  4,341  
Less: accumulated depreciation and amortization(3,864) (3,733) 
Property and equipment, net$477  $608  
Depreciation and amortization expense for the three months ended March 31, 2020 and 2019 was $0.1 million and $0.2 million, respectively.
4. FAIR VALUE MEASUREMENTS
The following table sets forth by level, within the fair value hierarchy, financial assets measured at fair value on a recurring basis (in thousands):
Fair value measurements at March 31, 2020 using:
Level 1Level 2Level 3Total
Assets:
Cash Equivalents$70,522  $  $  $70,522  
Total$70,522  $  $  $70,522  

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Fair value measurements at December 31, 2019 using:
Level 1Level 2Level 3Total
Assets:
Cash Equivalents$91,803  $  $  $91,803  
Total$91,803  $  $  $91,803  
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 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 2018 amendment to the Company's debt facility.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other liabilities consisted of the following (in thousands):
March 31,
2020
December 31,
2019
Accrued employee compensation and benefits$977  $3,109  
Accrued external research and development expenses1,129  1,799  
Accrued professional fees961  985  
Other95  465  
Total accrued expenses and other current liabilities$3,162  $6,358  

6. DEBT FINANCING
Long term debt consisted of the following (in thousands):
March 31,
2020
December 31,
2019
Principal amount of long term debt$26,000  $26,000  
Debt discount(419) (456) 
Deferred financing fees(594) (647) 
Current portion of long term debt(2,167)   
Long term debt, net of current portion and discount$22,820  $24,897  
In January 2018, the Company entered into a secured debt facility (the "2018 Facility"). The 2018 Facility has an interest rate equal to the LIBOR plus 8.50% per annum (10.10% as of March 31, 2020) payable monthly. 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 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.
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For the three months ended March 31, 2020 and 2019, interest expense arising from the amortization of the debt discount and deferred financing fees was $0.1 million and $0.2 million, respectively.
Terminal Interest Fee
The Company's debt facility includes a terminal interest fee obligation totaling $1.4 million, which is due with the final principal payment of the loan and has been modified from time to time as the facilities were amended. The Company is accruing the terminal fee obligation over the term of the facility. The carrying value of the terminal interest fee was $0.9 million and $0.9 million at March 31, 2020 and December 31, 2019, respectively.
The scheduled principal maturity of the long term debt, as of March 31, 2020 is as follows (in thousands):
Year Ending December 31,
2021$11,917  
202213,000  
20231,083  
$26,000  

7. STOCKHOLDERS' EQUITY
Redeemable Convertible Preferred Stock
Upon closing of the IPO, all outstanding redeemable convertible preferred stock converted into an aggregate of 14,641,997 shares of common stock. The holders of the Company’s preferred stock had certain voting, dividend, and redemption rights, as well as liquidation preferences and conversion privileges. All rights, preferences, and privileges associated with the preferred stock were terminated at the time of the Company’s IPO in conjunction with the conversion of all outstanding shares of preferred stock into shares of common stock.
Initial Public Offering
In May 2019, the Company issued 3,571,428 common shares at a public offering price of $20.00 per share for net proceeds of $64.5 million, after deducting underwriting discounts and commissions and other offering expenses.
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 completion of 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 and cash-based awards 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. On January 1, 2020, the number of shares available for issuance under the 2019 Plan was automatically increased by 927,553 shares.
The number of shares available for future grant under the 2019 Plan was 601,721 as of March 31, 2020.


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2019 Employee Stock Purchase Plan
The 2019 Employee Stock Purchase Plan (the "2019 ESPP") was approved by the Company's board of directors on April 29, 2019 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. On January 1, 2020, the number of shares available to be issued under the ESPP automatically increased by 231,888 shares.
As of March 31, 2020, the total number of shares that may be issued under the ESPP was 469,069 shares. As of March 31, 2020, the initial purchase period under the ESPP has not yet commenced.
Stock Option Valuation
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. As there was no public market for its common stock prior to May 9, 2019, which was the first day of trading, and as the trading history of the Company’s common stock was limited through March 31, 2020, the Company determined the volatility for awards granted based on an analysis of reported data for a group of guideline companies that issued options with substantially similar terms. The expected volatility has been determined using a weighted-average of the historical volatility measures of this group of guideline companies. The Company expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero.

The assumptions that the Company used to determine the grant-date fair value of stock options granted were as follows:
Three Months Ended
March 31,
20202019
Risk-free interest rate1.64 %
2.30% - 2.50%
Expected option life (in years)6.116.25
Expected dividend yield0 %0 %
Expected volatility 72.5 %73.4 %
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Stock Option Activity
The following table summarizes the Company’s stock option activity for the three months ended March 31, 2020:
Number of SharesWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Life
(in Years)
Intrinsic
Value
(in
thousands)
Outstanding as of January 1, 20205,176,944  $7.35  
Granted473,090  4.15  
Exercised    
Canceled(206,956) 6.75  
Outstanding as of March 31, 20205,443,078  $7.09  8.1$1,035  
Exercisable as of March 31, 20202,331,934  $5.99  7.1$1,027  
Vested or expected to vest as of March 31, 20205,385,856  $7.05  8.0$1,034  
The intrinsic value of options exercised during the three months ended March 31, 2020 and 2019 was $0 and $0, respectively.
The weighted-average grant date fair value of the options granted during the three months ended March 31, 2020 and 2019, was $2.69 and $5.02 per share, respectively.
Restricted Stock Units
The following table summarizes the Company's restricted stock unit activity for the three months ended March 31, 2020:
Number of SharesWeighted Average Grant Date Fair Value per Share
Outstanding as of January 1, 202066,801  $3.40  
Granted96,166  4.12  
Vested    
Forfeited    
Outstanding as of March 31, 2020162,967  $3.82  

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Stock-based compensation expense
The following table summarizes stock-based compensation expense during the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended
March 31,
20202019
Stock-based compensation expense by type of award:
Time-based vesting stock options$1,573  $1,137  
Performance vesting stock options    
Restricted stock units26  
Total stock compensation expense$1,599  $1,137  

Stock-based compensation related to stock options and unvested stock awards are classified as follows (in thousands):
Three Months Ended
March 31,
20202019
Research and development
$716  $482  
General and administrative
883  655  
Total stock compensation expense$1,599  $1,137  
As of March 31, 2020, there was $13.6 million of unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of approximately 2.57 years and $0.6 million of unrecognized compensation expense related to unvested restricted stock units that is expected to be recognized over a weighted-average period of approximately 2.74 years.
8. NET LOSS PER SHARE
Net Loss Per Share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):
Three Months Ended
March 31,
20202019
Numerator:
Net loss
$(15,009) $(11,573) 
Accretion of redeemable convertible preferred stock
  (46) 
Net loss attributable to common stockholders
$(15,009) $(11,619) 
Denominator:
Weighted average common shares outstanding, basic and diluted
23,188,816  4,775,828  
Net loss per share, basic and diluted
$(0.65) $(2.43) 
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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:
Three Months Ended
March 31,
20202019
Redeemable convertible preferred stock (as converted to common stock)
  14,641,997  
Warrants to purchase redeemable convertible preferred stock (as converted to common stock)
  61,235  
Options to purchase common stock
5,443,078  4,573,119  
Unvested restricted stock units
162,967    
5,606,045  19,276,351  
Upon closing of the IPO, all of the redeemable convertible preferred stock converted into 14,641,997 shares of common stock. In addition, 3,571,428 shares of common stock were issued as part of the IPO.
9. RELATED-PARTY TRANSACTIONS

In August 2019, the Company entered into a consulting agreement with the Chairman of the Company's Board of Directors, to provide various consulting services to the Company. The total expense under the agreement for the three months ended March 31, 2020 was $0.1 million. As of March 31, 2020, there were no amounts payable to the Chairman for costs related to the consulting agreement.

10. SUBSEQUENT EVENTS

The Company has evaluated subsequent events for financial statement purposes occurring through May 11, 2020, the date that these condensed consolidated financial statements were issued.

* * * * * *
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of Axcella Health Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report, and the audited financial statements and notes included in our Annual Report on Form 10-K, filed with the SEC on March 23, 2020. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. We caution you that forward-looking statements are not guarantees of future performance, and that our actual results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate, may differ materially from the results discussed or projected in the forward-looking statements contained in this Quarterly Report. We discuss risks and other factors that we believe could cause or contribute to these potential differences elsewhere in this Quarterly Report, including under Item 1A. “Risk Factors” and under “Special Note Regarding Forward-Looking Statements.” In addition, even if our results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
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Overview
We are a clinical-stage biotechnology company focused on leveraging endogenous metabolic modulators, or EMMs, to pioneer a new approach for treating complex diseases and improving health. Our product candidates are comprised of multiple EMMs that are engineered in distinct combinations and ratios with the goal of simultaneously impacting multiple biological pathways. Our pipeline includes lead therapeutic candidates for non-alcoholic steatohepatitis, or NASH, and the reduction in risk of overt hepatic encephalopathy, or OHE, recurrence. Additional muscle- and blood-related programs are in earlier-stage development.

Using our development platform, we have efficiently designed a pipeline of product candidates that are comprised of amino acids and their derivatives. These orally administered EMM compositions are designed to have multifactorial effects, and their constituents have a general history of safe use.

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

https://cdn.kscope.io/ec0bd039d51df19f1842b9c93821edc8-axla-20200331_g1.jpg

1.Initial Clinical Studies refers to Non-IND Clinical Studies initiated prior to a development path decision.
2.Planned Clinical Trial, contingent upon allowance by the FDA. Timing based on current expectations and subject to risks associated with the COVID-19 pandemic.
3.Indication expected to be reduction in risk of overt hepatic encephalopathy recurrence.
4.We believe that this has the potential to serve as a registrational Clinical Trial, subject to final data readout from ongoing Clinical Study and allowance by the FDA.

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

https://cdn.kscope.io/ec0bd039d51df19f1842b9c93821edc8-axla-20200331_g2.jpg
1.Initial Clinical Studies refers to non-IND Clinical Studies initiated prior to a development path decision. Timing of planned cohort 1 readout based on current expectations and subject to risks associated with the COVID-19 pandemic.


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To date, we have funded our operations with proceeds from the sale of preferred stock, the sale of common stock in our initial public offering, or our IPO, and borrowing of debt. Through March 31, 2020, we had received gross proceeds of $197.8 million from the sale of preferred stock, gross proceeds of $71.4 million from the sale of common stock in our IPO and $26.0 million from borrowings under our loan and security agreement. Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were $15.0 million and $11.6 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, we had an accumulated deficit of $231.1 million. We expect to continue to incur significant expenses for at least the next several years as we continue to develop our product candidates.

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

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
As of March 31, 2020, we had cash and cash equivalents of $75.5 million. We believe that our existing cash and cash equivalents as of March 31, 2020 will enable us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next 12 months following the filing date of this Quarterly Report on Form 10-Q. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.” To finance our operations significantly beyond that point, we will need to raise additional capital, which cannot be assured.

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The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions, business shutdowns, and clinical site closures to non-essential care and clinical trials. For example, our AXA1957-002 Clinical Study was temporarily suspended in March 2020 due to COVID-19 impact on our clinical trial sites. Subsequently, based on positive data in our AXA1125-003 Clinical Study announced on May 6, 2020, we decided against reinitiating AXA1957-002 and to move forward with AXA1125 as our NASH product candidate for both adult and pediatric patients. Although we cannot presently predict the full scope and severity of COVID-19, these developments and measures could materially and adversely affect our business, our results of operations and financial condition. For instance, the COVID-19 pandemic may adversely impact our ability to conduct and complete our ongoing Clinical Studies, including AXA1665-002 and AXA4010-001, or initiate our planned Clinical Trials for AXA1665 and AXA1125 under INDs in a timely manner or at all due to patient or principal investigator recruitment or availability challenges, clinical trial site shutdowns or other interruptions. Furthermore, as a result of the COVID-19 pandemic, we may also experience limitations on the quality, completeness and interpretability of data we are able to collect; we or our key third-party service providers may not be able to complete key program and product development milestones on time or at all; quarantines, shelter-in-place and similar government orders may impact personnel at third-party manufacturing facilities that negatively impact the availability or cost of materials used in our product candidates; market volatility and conditions may limit our ability to raise additional capital to finance our business plans on attractive terms or at all; our business continuity plans may not be effective at limiting operational disruptions or delays; we may suffer negative impacts to operations that may be vulnerable as a result of government or company measures taken to control the spread of COVID-19; potential shutdowns of government agencies such as the SEC or FDA may limit our ability to raise capital and negatively impact our product development timelines; the passage of new legislation may increase our operating costs or limit our operations, such as the Families First Coronavirus Response Act; we may suffer negative consequences due to vulnerabilities that may emerge as a result of our limited operations, such as a cybersecurity incident; or one of our key executives, scientists or other personnel becomes incapacitated by COVID-19.

The extent to which COVID-19 impacts our business, operations or financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, new information that may emerge concerning the severity of COVID-19 or the nature or effectiveness of actions to contain COVID-19 or treat its impact, among others. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions. If we or any of the third parties with whom we engage, however, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on our business, results of operations and financial condition.
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Components of our results of operations
Revenue
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or we execute license or collaboration agreements with third parties, we may generate revenue in the future from product sales, payments from collaborations or license agreements that we may enter into with third parties, or any combination thereof.
Operating expenses
Research and development expenses
Our research and development expenses consist primarily of costs incurred in connection with our research activities, including our drug discovery efforts, and the development of our product candidates, which include:
direct external research and development expenses, including fees, reimbursed materials and other costs paid to consultants, contractors, contract manufacturing organizations, or CMOs and clinical research organizations, or CROs, in connection with our clinical and preclinical development and manufacturing activities;
employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research and development functions;
expenses incurred in connection with the preclinical and clinical development of our product candidates, including any Clinical Studies, planned Clinical Trials and other research programs, including under agreements with third parties, such as consultants, contractors and CROs;
the cost of developing and scaling our manufacturing process and manufacturing products for use in our preclinical studies, Clinical Studies and Clinical Trials, including under agreements with third parties, such as consultants, contractors and CMOs;
patent-related costs incurred in connection with filing and prosecuting patent applications; and
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance.

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

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

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

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

We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our Clinical Studies and planned Clinical Trials. We may elect to discontinue, delay or modify development of some product candidates or focus on others. Any changes in the outcome of any of these variables with respect to the development of our product candidates in development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of Clinical Trials or require us to conduct additional Clinical Studies, Clinical Trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our planned Clinical Studies or Clinical Trials, including as a result of the COVID-19 pandemic, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. Identifying potential product candidates and conducting preclinical testing, Clinical Studies and Clinical Trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. See “Risk Factors” for further discussion of these and additional risks and uncertainties associated with product development and commercialization that may significantly affect the timing and cost of our research and development expenses and our ability to obtain regulatory approval for and successfully commercialize our product candidates. We expect research and development expenses to increase as we advance existing product candidates into additional Clinical Trials and Clinical Studies and develop new product candidates.
General and administrative expenses
General and administrative expenses consist primarily of salaries, benefits, travel and stock-based compensation expense for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for legal, consulting, accounting and audit services.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development of our product candidates. We also anticipate that we will incur increased finance, accounting, audit, legal, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidate.
Other income (expense)
Interest expense, net
Interest expense consists of interest expense on outstanding borrowings under our loan and security agreement as well as amortization of debt discount and debt issuance costs. Interest income has historically been insignificant and consists of interest earned on our invested cash balances.
Income taxes
Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss, or NOLs, carryforwards and tax credits will not be realized.
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Results of Operations
Comparison of the Three Months Ended March 31, 2020 and 2019
The following table summarizes our results of operations for the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended
March 31,
20202019Change
Operating expenses:
Research and development
$10,335  $7,563  $2,772  
General and administrative
4,125  3,468  657  
Total operating expenses
14,460  11,031  3,429  
Loss from operations
(14,460) (11,031) (3,429) 
Other income (expense):
Interest income257  390  (133) 
Other income(4)—  (4) 
Change in fair value of preferred stock warrant liability
—  (51) 51  
Interest expense
(802) (881) 79  
Total other expense, net
(549) (542) (7) 
Net loss
$(15,009) $(11,573) $(3,436) 
Research and Development Expenses
The following table summarizes our research and development expenses incurred during the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended
March 31,
20202019Change
Salary and benefits-related$4,649  $3,126  $1,523  
Clinical research and outside services4,633  3,446  1,187  
Facility related and other1,053  991  62  
Total research and development expenses$10,335  $7,563  $2,772  

The increase of $1.5 million in salary and benefits-related costs resulted from our hiring of additional personnel in research and development to support our development programs. Clinical research and outside services costs increased by $1.2 million due to greater costs associated with the advancement of our product candidates and Clinical Studies.
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General and Administrative Expenses
The following table summarizes our general and administrative expenses incurred during the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended
March 31,
20202019Change
Salary and benefits-related$2,509  $2,405  $104  
Other contract services and outside costs1,346  900  446  
Facility related and other270  163  107  
Total general and administrative expenses$4,125  $3,468  $657  

Salary and benefits-related costs increased by $0.1 million as a result of increased headcount in connection with becoming a public company. Other contract services and outside costs increased by $0.4 million, driven by increases of $0.2 million in professional fees, largely as a result of activities related to becoming a public company, and $0.2 million in consulting expense.
Other Income (Expense), net
Other income (expense), net was a net expense of $0.5 million for the three months ended March 31, 2020, compared to a net expense of $0.5 million for the three months ended March 31, 2019. The activity in other expense for the current year compared to the prior year included a decrease in interest income of $0.1 million, offset by a decrease of $0.1 million for interest expense related to borrowings under our loan and security agreement.
Liquidity and Capital Resources
Since our inception, we have not generated any revenue and have incurred significant operating losses and negative cash flows from our operations. We have funded our operations to date primarily with proceeds from the sale of preferred stock, the sale of common stock in our IPO and borrowings under our loan and security agreement.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):
Three Months Ended
March 31,
20202019
Cash used in operating activities
$(16,531) $(12,197) 
Cash used in investing activities
—  (47) 
Cash used in financing activities
—  (453) 
Net decrease in cash and cash equivalents$(16,531) $(12,697) 





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Operating Activities
During the three months ended March 31, 2020, operating activities used $16.5 million of cash and cash equivalents, resulting from our net loss of $15.0 million, partially offset by net non-cash charges of $1.9 million, primarily consisting of stock-based compensation expense, and net cash used by changes in our operating assets and liabilities of $3.4 million. Net cash used by changes in our operating assets and liabilities for the three months ended March 31, 2020 consisted primarily of a $3.5 million decrease in accounts payable and accrued expenses and other current liabilities and a $0.1 million increase in prepaid expenses and other current assets. The decreases in accounts payable and accrued expenses and other current liabilities were primarily due to the timing of ongoing research and development activities and the payment of 2019 incentive bonuses during the three months ended March 31, 2020. The increase in prepaid expenses and other current assets was primarily due to increased prepayments for research and development costs.
During the three months ended March 31, 2019, operating activities used $12.2 million of cash and cash equivalents, primarily resulting from our net loss of $11.6 million, an increase in prepaid expense of $0.8 million and a decrease in accrued expense of $2.2 million. This was partially offset by non-cash charges, including stock-based compensation expense of $1.1 million, depreciation expense of $0.2 million and an increase in accounts payable of $0.9 million.
Investing Activities
During the three months ended March 31, 2020, there were no investing cash inflows or outflows. Net cash used in investing activities for the three months ended March 31, 2019 consisted of the purchase of capital equipment during the period.
Financing Activities
During the three months ended March 31, 2020, there were no financing cash inflows or outflows.
During the three months ended March 31, 2019, net cash used in financing activities was $0.5 million, which primarily consisted of payments of IPO offering costs.
Loan and Security Agreement
At March 31, 2020, we had $26.0 million in outstanding long-term debt pursuant to our loan and security agreement. 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 will commence February 2021 for 24 months. The terminal interest fee of 5.35%, or $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 ranted a negative pledge on such intellectual property. There are no financial covenants under our loan and security agreement.

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Funding Requirements
We believe that our existing cash and cash equivalents as of March 31, 2020 will be adequate to fund our operating expenses, capital expenditure requirements and debt service obligations through at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance existing product candidates into additional Clinical Trials and Clinical Studies and develop new product candidates. Our cash requirements depend on numerous factors, including, without limitation, expenditures in connection with our research and development programs, including with respect to the timing and progress of Clinical Trials, Clinical Studies and preclinical development activities; payments to CROs, CMOs and other third-party providers; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; our ability to raise additional equity or debt financing; potential repayments of our long-term debt; and our ability to enter into collaboration or license agreements and our receipt of any upfront, milestone or other payments thereunder. Changes in our research and development plans or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources. See “Risk Factors” for further discussion of these and additional risks and uncertainties that may significantly affect the timing and amount of expenditures of our capital resources.
We will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, strategic alliances and marketing and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all, including as a result of market volatility following the COVID-19 pandemic. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. We also intend to continue to evaluate options to refinance our outstanding long-term debt. The amounts involved in any such transactions, individually or in the aggregate, may be material.
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the financial statements prospectively from the date of change in estimates. There have been no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 23, 2020.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not have, any off-balance sheet arrangements, as defined under applicable SEC rules.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.
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Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and, as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
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 March 31, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of March 31, 2020 were effective at a reasonable assurance level in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material change to our internal control over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the effect of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
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.
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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. To date, our product candidates have been or are currently being studied in Clinical Studies as food products. Subject to the successful completion of and supportive data from AXA1665-002, our ongoing Clinical Study of AXA1665, and positive feedback and allowance by FDA for our AXA1665 and AXA1125 programs, we plan to pursue future development of AXA1665 and AXA1125 in Clinical Trials enabled by IND applications. We have no products approved for commercial sale, have not generated any revenue from product sales to date and continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in 2008. Our net loss was $15.0 million for the three months ended March 31, 2020 and $59.0 million for the year ended December 31, 2019, respectively. As of March 31, 2020, we had an accumulated deficit of $231.1 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 our product candidates in Clinical Studies, Clinical Trials for any product candidate we elect to develop as a drug product candidate under an IND and as we seek regulatory approvals, as necessary, for and commercialize our product candidates, if approved. We anticipate that our expenses will increase substantially if, and as, we:
conduct preclinical studies, Clinical Studies, and for those product candidates that we elect to develop as therapeutics, Clinical Trials or their equivalent in non-U.S. jurisdictions;
incur setbacks or delays to the initiation or completion of preclinical studies, product development, Clinical Studies and/or Clinical Trials due to the COVID-19 pandemic;
further develop our proprietary human-focused product development platform;
continue to discover and develop our current product candidates as well as additional product candidates;
maintain, expand and protect our intellectual property portfolio;
hire or contract additional clinical, scientific, manufacturing, quality and commercial personnel to support our product research, development and commercialization efforts;
continue to develop, scale and validate a manufacturing process and specifications for our product candidates, including under requirements for drug development;
incur any disruption or delays to the supply of our product candidates due to the COVID-19 pandemic;
continue to establish in-house manufacturing capabilities for our research and product development efforts;
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establish a commercial manufacturing source and secure supply chain capacity sufficient to provide preclinical study material, Clinical Study material, Clinical Trial material for any product candidate we elect to develop as a drug product candidate under an IND, and commercial quantities of any product candidates that we may commercialize as drug or non-drug products, following receipt of any necessary approvals or authorizations;
acquire or in-license other product candidates and technologies;
seek various non-drug product marketing pathways and, if applicable, drug regulatory authorizations;
establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we may obtain regulatory approval or identify an alternate regulatory pathway to market; and
add operational, compliance, financial and management information systems and personnel to support our operations as a public company.
To become and remain profitable, we or any potential future collaborator must develop and eventually commercialize products with significant market potential at an adequate profit margin after cost of goods sold and other expenses. This will require us to be successful in a range of challenging activities, including, but not limited to: completing preclinical studies, Clinical Studies and Clinical Trials for any product candidate we elect to develop as a drug product candidate under an IND; obtaining marketing approval or identifying alternate regulatory pathways for product candidates; manufacturing, marketing and selling products for which we may obtain marketing approval; or successfully satisfying any pre- or post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue that is significant enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company, which could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause you to lose all or part of your investment.
Even if we succeed in commercializing one or more of our product candidates, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, which may be significant. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders' equity and working capital.
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We will require additional capital to fund our operations and if we fail to obtain necessary financing, we will not be able to complete development and commercialization of our product candidates.
Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts for our current and future programs: to conduct further research and development, preclinical studies, Clinical Studies and/or Clinical Trials for any product candidates we elect to develop as a drug product candidate under an IND; to validate the manufacturing process and specifications for our product candidates; to seek regulatory approvals for or identify alternate regulatory pathways to market for our product candidates; and to launch and commercialize any products for which we receive regulatory approval or identify an alternate regulatory pathway to market, including potentially building our own commercial organization. As of March 31, 2020, we had $75.5 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 at least the next 12 months. However, our future capital requirements and the period for which our existing resources will support our operations may vary significantly from our expectations, and we will in any event require additional capital in order to complete clinical development of any of our current product candidates. Our monthly spending levels will vary based on new and ongoing development and corporate activities. Because the length of time and activities associated with development of our product candidates is highly uncertain, we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
our decisions regarding the development path under which we will develop our product candidates (e.g., either continuing to develop a product candidate as a non-drug product, or initiating development as drug product candidate under an IND or non-U.S. equivalent);
the initiation, progress, timing, costs and results of preclinical studies, Clinical Studies, planned Clinical Trials, and any need to conduct additional studies as may be required by a regulatory authority, including additional studies that may be required by a regulatory authority in order to allow the initiation of Clinical Trials under an IND or the non-U.S. equivalent for any of our product candidates;
any clinical development plans we establish for these product candidates;
any setbacks or delays to the initiation or completion of preclinical studies, Clinical Studies and/or Clinical Trials due to the COVID-19 pandemic;
further development of our development platform and supporting infrastructure;
the number and characteristics of product candidates that we develop or may in-license;
the terms of any partnership or collaboration agreements we may choose to initiate or conclude;
the outcome, timing and cost of meeting regulatory requirements established by the FDA, any other regulatory authorities in the United States, and, when applicable, comparable foreign regulatory authorities, such as the EMA;
the effect of changes in regulations or policy relating to the development and commercialization of our product candidates by the FDA, any other regulatory authorities in the United States and, when applicable, other comparable foreign regulatory authorities, such as the EMA;
the cost of establishing, maintaining and overseeing a quality system compliant with GCP (quality regulations, guidance and standards applicable to oversight of Clinical Trials, if any);
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the costs of establishing, maintaining and overseeing a quality system compliant with current Good Manufacturing Practice, or cGMP, and other quality standards applicable to non-drug and drug product development and a supply chain for the development and manufacture of our product candidates;
any disruption or delays to the supply of our product candidates due to the COVID-19 pandemic;
the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us related to our product candidates or our development platform, or other technologies;
the effect of competing technological and market developments;
the cost and timing of establishing, expanding and scaling compliance programs related to our activities and product candidate development and commercialization and related legal activities, including defense of any potential litigation against us;
the cost and timing of establishing, expanding and scaling of manufacturing capabilities, or contracting with third parties for access to such capabilities; and
the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval or identify alternate regulatory pathways in regions where we choose to commercialize our products.
We do not have any committed external source of funds or other support for our development efforts and we cannot be certain that additional funding will be available on acceptable terms, or at all. Until we can generate sufficient product revenue or, if we were to enter into third-party agreements, royalty revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. If we raise additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights. Further, to the extent that we raise additional capital through the sale of common stock or securities convertible into or exchangeable for common stock, your ownership interest will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends or acquiring or licensing intellectual property rights. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. We also could be required to seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or relinquish our rights to product candidates or technologies that we otherwise would seek to develop or commercialize ourselves. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates or one or more of our other research and development initiatives. Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline, causing you to lose all or part of your investment.
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Clinical development is a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of any product candidates, which could impair our ability to fund our operations or obtain financing on acceptable terms, or at all.
To obtain the requisite regulatory approvals to commercialize any of our product candidates that we decide to develop as a drug product candidate, we must demonstrate through extensive preclinical studies and Clinical Trials that our product candidates are safe and effective in humans for their intended use. Clinical Studies to commercialize non-drug products also require a significant financial investment to generate data that supports claims we may make for such products and establish their safety and tolerability. Clinical testing is expensive, difficult to design and implement and can take many years to complete, and its outcome is inherently uncertain. We may be unable to establish, where applicable, endpoints, dose levels and regimens or bioanalytical assay methods that applicable regulatory authorities would consider clinically meaningful or legally permissible. A Clinical Study or Clinical Trial can fail at any stage of testing. Additionally, our Clinical Studies, Clinical Trials or other studies may not result in data that supports intended claims for our product candidates. The outcome of preclinical studies, Clinical Studies and early Clinical Trials may not be predictive of the success of later preclinical studies, Clinical Studies and/or Clinical Trials, and interim results of these studies or trials do not necessarily predict final results. In particular, differences in trial design between Clinical Studies and early-stage Clinical Trials and later-stage Clinical Trials make it difficult to extrapolate from the results of Clinical Studies and earlier Clinical Trials to the results from later Clinical Trials. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and Clinical Trials have nonetheless failed to obtain marketing approval of their product candidates, or have data that supports desirable marketing claims even where marketing approval is not required.
Successful completion of Clinical Trials is a prerequisite to submitting an NDA to the FDA, or its equivalent in other jurisdictions such as a marketing authorization application to the EMA, for each product candidate targeting therapeutic indication(s) and, consequently, a pre-requisite for the ultimate approval and commercial marketing of any product candidate for therapeutic indication(s). We do not know whether we will be able to initiate or complete Clinical Trials for product candidates we decide to develop as drug product candidates on schedule, if at all. Additionally, we may determine as a result of factors in or out of control to terminate plans or efforts in connection with planned Clinical Studies or Clinical Trials. For example, if we do not have sufficient funds to finance our planned Clinical Studies or Clinical Trials or the FDA or equivalent regulatory authority has requirements we are not able to comply with, or that we decide to not comply with, we may need to delay or cancel one or more of our planned Clinical Studies or Clinical Trials.
We may experience delays in completing our preclinical studies and initiating or completing Clinical Studies and, for those product candidates that we decide to develop as drug product candidates, Clinical Trials. We also may experience numerous unforeseen events during, or as a result of, any future Clinical Studies or Clinical Trials that we may conduct that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including, but not limited to:
unforeseen events or events over which we have little to no control, such as the COVID-19 pandemic, can cause execution delays for our Clinical Studies or Clinical Trials, and issues related to the quality, completeness and interpretability of our data that could result in significant delays or additional costs and impact development plans for our product candidates;
we may be unable to generate sufficient preclinical, toxicology or other in vivo or in vitro data to support the initiation of Clinical Trials for therapeutic indications for any drug product candidates or the marketing of our products as non-drug products;
the FDA may not allow us to use data from our Clinical Studies to support a late-phase IND Clinical Trial or an IND Clinical Trial of any phase for AXA1665, AXA1125 or any other product candidate we decide to develop as a drug product candidate instead of a non-drug product candidate;
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the FDA or other regulatory authorities may disagree with the design, implementation or results of our Clinical Studies or Clinical Trials, which may delay or prevent us from pursuing certain regulatory pathways for product developments, or require us to submit additional data such as long-term toxicology studies or impose other requirements before permitting us to initiate or complete a Clinical Trial of any phase. For example, the FDA could require that we terminate a Clinical Study for a product candidate and continue such study only under an IND, and we may not be able to obtain such an IND, if at all, or we may be subject to an enforcement action for conducting a Clinical Study not under an IND. Additionally, although we hope to use data from Clinical Studies that we have completed or are currently conducting for AXA1665 and AXA1125 to support initial Clinical Trials in late phases (Phase 2 or registrational trials), the FDA may not authorize us to pursue a Clinical Trial for one or more of these product candidates in a late phase or at all;
regulatory authorities, IRBs or ethics committees may not authorize us or our investigators to commence or conduct a Clinical Study or Clinical Trial at a prospective study or trial site or may request early termination of a Clinical Study or Clinical Trial;
we may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective study or trial sites and prospective contract research organizations, or CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and study or trial sites;
Clinical Studies or Clinical Trials of any of our product candidates may produce negative or inconclusive results and we may need to conduct additional preclinical studies, Clinical Studies, Clinical Trials or any other studies, or we may decide to abandon product development programs;
the number of subjects or patients required for Clinical Studies or Clinical Trials of any of our product candidates may be larger than we anticipate, enrollment in these clinical studies or trials may be slower than we anticipate or subjects or patients may withdraw from these clinical studies or trials prior to completion or fail to return for required follow-up post study or trial completion at a higher rate than we anticipate;
we may need to add new or additional Clinical Study or Clinical Trial sites for various reasons, for example, our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, or may deviate from the Clinical Study or Clinical Trial protocol or stop providing services for the study or trial, which may require that we add new clinical study or trial sites or investigators;
the cost of preclinical studies, Clinical Studies, Clinical Trials or any other studies of any product candidates may be more than we anticipate or more than our available financial resources;
the supply or quality of our product candidates or other materials necessary to conduct Clinical Studies and Clinical Trials, for which we expect to continue to rely on third party manufacturers and suppliers, may be insufficient or inadequate and may not achieve compliance with applicable cGMP and other quality standards applicable to drug or non-drug product development for various reasons including any potential failure of our oversight of their services or any potential inability of such third parties to successfully execute services in compliance with applicable rules and regulations;
our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulatory authorities, IRBs or ethics committees to suspend or terminate our Clinical Studies and Clinical Trials, or reports may arise from preclinical or clinical testing of our product candidates that raise safety or other concerns about one or more of our product candidates;
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preclinical studies, Clinical Studies or Clinical Trials of our product candidates may produce negative or inconclusive results, which may result in our deciding, or being required, to conduct additional clinical studies or trials or abandon product development programs; and
adverse events in a Clinical Study of a product candidate may cause the FDA or comparable foreign regulatory authorities to only allow future studies of such product candidate to proceed under an IND, if at all.
We could also encounter delays if a preclinical study, Clinical Study or Clinical Trial is suspended or terminated for any reason. Interruptions or suspensions of Clinical Studies or Clinical Trials related to the COVID-19 pandemic could result in issues related to the quality, completeness and interpretability of the data from such Clinical Studies or Clinical Trials or otherwise result in delays or increased costs in our development plans. A suspension or termination may be imposed due to a number of factors, including failure to conduct the Clinical Study or Clinical Trial in accordance with regulatory requirements or our clinical protocols, inspection of the Clinical Study or Clinical Trial operations or trial site by the FDA, comparable foreign regulatory authorities or IRB resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, including death of a study subject, failure to demonstrate a benefit from using a product or treatment, failure to establish or achieve clinically meaningful or legally permissible endpoints, changes in governmental regulations or administrative actions or lack of adequate funding to continue the Clinical Study or Clinical Trial. Many of the factors that cause, or lead to, a delay in the commencement or completion of Clinical Studies or Clinical Trials may also ultimately lead to the denial of regulatory approval of our product candidates for therapeutic indications, where applicable, or the failure to meet applicable regulatory requirements to support and commercialize non-drug products. Further, the FDA or comparable foreign regulatory authorities may disagree with our Clinical Study or Clinical Trial design and our interpretation of data from these clinical studies or trials, or may change the requirements for regulatory approval of a drug even after they have reviewed and commented on the design for our preclinical studies, Clinical Studies or Clinical Trials.
Our product development costs will increase, or our operations may be hindered or prevented if we experience delays in clinical testing and marketing approvals, if applicable, or otherwise meeting regulatory requirements to commercialize our product candidates. We do not know whether any of our preclinical studies, Clinical Studies or Clinical Trials, if applicable, will begin or be completed as planned, will need to be restructured or will be completed on schedule, or at all. Significant delays in our preclinical studies, Clinical Studies or Clinical Trial also could shorten any periods during which we may have the exclusive right to commercialize our product candidates and may allow our competitors to bring products to market before we do, potentially impairing our ability to successfully commercialize our product candidates and harming our business and results of operations. Any delays in our preclinical or future clinical development programs may harm our business, financial condition and prospects significantly, and could impair our ability to fund our operations or obtain financing on acceptable terms, or at all.

Risks related to our business, technology and industry
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 product 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. We recently completed our AXA1125-003 Clinical Study of AXA1125 and AXA1957 and plan to conduct a Clinical Trial of AXA1125 for NASH subject to allowance by the FDA. Pending completion of our ongoing Clinical Study of AXA1665, subject to supportive data and allowance by FDA, we plan to conduct Clinical Trials of AXA1665 for OHE. AXA4010 is currently being studied as a non-drug product under food regulations in an ongoing Clinical Study, although the ultimate pathway under which we will develop AXA4010, AXA2678 and future other product 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 such as dietary supplements) 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 product candidates, which may never occur.

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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 Clinical Studies for our product candidates to evaluate safety and tolerability and impact on normal structure and function only in healthy subjects or subjects with certain disease conditions. For product candidates we develop under an IND with patient populations reflecting the desired indication for such product candidate, the physiological structure and function data we observed in our Clinical Studies for such product candidate may not be replicated in or be consistent with results from Clinical Trials and such product candidate may not meet therapeutic efficacy endpoints in Clinical Trials. For instance, while we recently announced positive top-line data in our AXA1125-003 Clinical Study, including reductions in liver fat content and markers of fibroinflammation, such results may not be replicated in larger 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. To the extent we ultimately pursue a drug development pathway for any product candidates initially studied under Clinical Studies, we will need to transition from a company with a research Clinical Study focus to a company capable of supporting clinical development in Clinical Trials and, if successful, commercial activities. We may not be successful in such transitions.
Any use of our product candidates to support and maintain homeostasis, which helps support normal structures and functions of the body, or to modulate dysregulated metabolism is a novel approach and negative perception of any product candidates that we develop could adversely affect our ability to conduct our business, obtain regulatory approvals or identify alternate regulatory pathways, to the extent required by applicable laws, to market such product candidates.
Using EMMs in the compositions, ratios and formulations we use in our product candidates and the potential drug and non-drug applications of our product candidates represents a novel approach. Our product candidates in general may not be successfully developed or commercialized or gain the acceptance of the public or the medical community. For any product 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 product candidates, prescribing potential treatments that involve the use of our product 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 product 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 product candidates as non-drug product candidates, such as dietary supplements. 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, which may include death, in Clinical Studies and Clinical Trials of our product candidates or in studies or Clinical Trials of other parties 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 product 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 product candidates or demand for any products we may commercialize.
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All of our drug product candidates will require significant additional preclinical and clinical development before we can seek regulatory approval for and launch a drug product commercially.
For any product candidate that we plan to develop as drug product candidates under future IND-enabled Clinical Trials, such as AXA1665 and AXA1125, our business and future success will depend on our ability to obtain regulatory approval of and then successfully launch and commercialize such product candidate as a drug targeting a disease. Any future Clinical Trials of AXA1665, AXA1125 and any other product candidates that we decide to develop as drug product candidates may experience delays or other complications in Clinical 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, Clinical Studies or Clinical Trials are successfully executed, there is no guarantee that their results will confirm or be consistent with the results obtained from prior completed preclinical studies, Clinical Studies or Clinical Trials for our product candidates.
The product 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, 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 AXA1665, AXA1125, or our other drug product candidates encounter safety, efficacy, supply or manufacturing problems, developmental delays, regulatory or commercialization issues or other problems, our development plans, including for our other product candidates, and our business would be significantly harmed.
The successful development of our product candidates is highly uncertain.
Successful development of our product candidates is highly uncertain and is dependent on numerous factors, many of which are beyond our control. Product candidates that appear promising in the early phases of development may fail to reach the market for several reasons, including, but not limited to:

results from preclinical or Clinical Studies may demonstrate that our product 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 product candidates to have harmful or problematic side effects or toxicities;
Clinical Trial results may show any 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 Clinical Studies or Clinical Trials caused by slow enrollment, subjects dropping out of the Clinical Studies or Clinical Trials or other factors, including some which are out of our control, such as COVID-19, length of time to achieve clinical endpoints, additional time requirements for data analysis, or an inability to validate the manufacturing process or to achieve cGMP compliance for our product 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, an 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 comparable foreign 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 could make our product candidates uneconomical;
proprietary rights of others and their competing products and technologies that may prevent our product candidates from being commercialized; and
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for our EMM drug product candidates, the length of time necessary to complete Clinical Trials and to submit an application for marketing approval for a final decision by a regulatory authority may be difficult to predict, in large part because of the limited regulatory history of EMMs being approved for therapeutic use.

Even if we are successful in obtaining marketing approval for those product 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 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 cGMP and Good Clinical Practice, or GCP, as we (and our third-party contractors) are and will be required to comply with cGMP for products used in our Clinical Studies and/or Clinical Trials, including for any studies or trials we conduct post-marketing approval for or commercialization of any of our product candidates. 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 could be costly and any failure to comply or other issues with our drug products, if any, 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 product 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 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, 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 product 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 product 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 or trials and other product candidate 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, Clinical Study or Clinical Trial process. The results of preclinical studies, Clinical Studies as well as early Clinical Trials, as may be conducted, of our product candidates may not be predictive of the results of any later-stage clinical studies or trials. In addition, initial results in Clinical Studies and Clinical Trials, in particular as shown by any interim data, may not be indicative of results obtained when such 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 product candidates have been generally well tolerated in our Clinical Studies to date, but we cannot be certain that we will be able to dose subjects or patients at a high enough dose in any future Clinical Trials of product candidates we may develop as drugs so as to demonstrate efficacy without unacceptable safety risk.

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Product candidates in later stages of Clinical Studies may fail to show the desired safety profile despite having progressed through successful preclinical studies and earlier Clinical Studies. Product 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, 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 Clinical Studies or Clinical Trials will ultimately be successful or support further clinical development of any of our product candidates.

If significant adverse events, which may include death, or other side effects are observed in any of our current or future Clinical Studies or Clinical Trials, we may have difficulty recruiting subjects or patients for our Clinical Studies or Clinical Trials, subjects or patients may drop out of our Clinical Studies or Clinical Trials or we may be required to significantly redesign or abandon Clinical Studies or Clinical Trials or our development efforts of one or more product candidates altogether. We, the FDA or other applicable regulatory authorities or an IRB may suspend Clinical Studies or Clinical Trials of a product candidate at any time for various reasons, including a belief that subjects or patients in such Clinical Studies or Clinical Trials are being exposed to unacceptable health risks or adverse side effects or FDA or other applicable regulatory authorities could determine that our Clinical Studies need to be stopped and any further research for a product candidate needs to be conducted under a Clinical Trial instead. Some potential non-drug products and drug product candidates that initially showed promise for further development in early-stage testing, including in 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 a product 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 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 subjects or patients in our 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 Clinical Studies and Clinical Trials for a variety of reasons. The timely completion of 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 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 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 Clinical Study or Clinical Trial;
the proximity of subjects or patients to study and trial sites;
the design of the Clinical Study or Clinical 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 product 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 Clinical Trials;
the subject or patient referral practices of physicians;
the ability to monitor subjects or patients adequately during and after study product administration;
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our ability to obtain and maintain subject and patient consents;
factors we may not be able to control, such as potential pandemics that may limit subject, principal investigator or staff and clinical site availability (e.g. the COVID-19 pandemic); and
the risk that subjects or patients enrolled in Clinical Studies or Clinical Trials will drop out of the Clinical Studies or Clinical Trials before completion.
In addition, our 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 product 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 Clinical 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 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 Clinical Studies and Clinical Trials in such sites. Moreover, because our product 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 or Clinical Study or Clinical Trial delays may result in increased costs or may affect the timing or outcome of our planned Clinical Studies or future Clinical Trials, which could prevent their completion or otherwise may negatively impact the quality, completeness and interpretability of data that we are able to collect and adversely affect our ability to advance the development of our product candidates.
Interim and preliminary data from our 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.
To date, our Clinical Studies have been exploratory in nature, with a primary focus on the assessment of safety and tolerability and impact on normal structures and functions. Data from larger subsequent studies may not support or may be inconsistent with our observations in our completed Clinical Studies. From time to time, we may conduct 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 subject enrollment continues, more subject data become available and as the study is completed. 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.
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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 product candidates.
We face an inherent risk of product liability as a result of testing our product candidates in Clinical Studies and, if we decide to develop any product candidates as a drug product candidate, Clinical Trials, 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 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 product candidates cause or are perceived to cause injury or are found to be otherwise unsuitable during 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, 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 a product candidate to the m