The following discussion of the financial condition and results of operations ofAxcella 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 theSEC onMarch 17, 2021 . In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. We caution you that forward-looking statements are not guarantees of future performance, and that our actual results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate, may differ materially from the results discussed or projected in the forward-looking statements contained in this Quarterly Report. We discuss risks and other factors that we believe could cause or contribute to these potential differences elsewhere in this Quarterly Report, including under Part II, 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 theSEC to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. Overview We are a clinical-stage biotechnology company focused on pioneering a new approach to treat complex diseases and improve health using endogenous metabolic modulator, or EMM, compositions. Our product candidates are comprised of multiple EMMs that are engineered in distinct combinations and ratios with the goal of simultaneously impacting multiple biological pathways. Our pipeline includes lead therapeutic candidates for the reduction in risk of recurrent overt hepatic encephalopathy, or OHE, and the treatment of non-alcoholic steatohepatitis, or NASH. Using our development platform, we have efficiently developed a pipeline of product candidates that are comprised of amino acids and their derivatives, which have a general history of safe use. These orally administered compositions have shown the potential to generate multifactorial effects in initial Clinical Studies. An overview of our current therapeutic product candidates and their planned next development steps is illustrated below: [[Image Removed: axla-20210630_g1.jpg]] 21
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AXA1665 for the Reduction in Risk of Recurrent OHE We have conducted two prior Clinical Studies of AXA1665 in subjects with mild (Child Pugh A) and moderate (Child Pugh B) hepatic insufficiency. AXA1665 was generally well tolerated in both of these studies, with multifactorial effects seen in subjects. The findings from our most recent Clinical Study, AXA1665-002, which were recently presented at the Digestive Disease Week 2021 Annual Meeting, replicated those seen on amino acid metabolism from our previous short-term Clinical Study. We also noted dose dependent, directionally consistent improvement across all three psychometric tests that were utilized in AXA1665-002. InJanuary 2021 , we receivedU.S. Food and Drug Administration (FDA) clearance of an Investigational New Drug (IND) application for AXA1665, and we initiated our EMMPOWER Phase 2 Clinical Trial for this candidate in the second quarter of 2021. This randomized, double-blind, placebo-controlled, multi-center investigation is evaluating the efficacy and safety of AXA1665 in patients who have experienced at least one prior OHE event and have neurocognitive dysfunction at screening. Approximately 150 patients on lactulose ± rifaximin (stratified by rifaximin use) will be randomized 1:1 to receive either 53.8 grams per day of AXA1665 or a matched placebo in three divided doses for 24 weeks, with a four-week safety follow-up period.The Clinical Trial's primary endpoint will assess the proportion of patients with a ?2 point increase in the psychometric hepatic encephalopathy score (PHES) after the 24-week treatment period. Key secondary endpoints will focus on the proportion of patients experiencing an OHE breakthrough event and time to first OHE breakthrough event, including time to hospitalization. Other secondary endpoints include changes in physical function and patient-reported outcomes. AXA1125 for the Treatment of NASH We have conducted two prior Clinical Studies of AXA1125 in subjects with presumed NASH. AXA1125 was generally well tolerated in both of these studies with meaningful and sustained reductions shown in key measures of hepatic fat, insulin resistance, inflammation and fibrosis. In our most recent Clinical Study, AXA1125-003, reductions in these measures were even greater among subjects with type 2 diabetes. Notably, the forementioned results were seen without an impact on mean body weight or serum lipids. InApril 2021 , we receivedU.S. Food and Drug Administration (FDA) clearance of an Investigational New Drug (IND) application for AXA1125, and we initiated our EMMPACT Phase 2b Clinical Trial for this candidate in the second quarter of 2021. This randomized, double-blind, placebo-controlled, multi-center Clinical Trial is evaluating the efficacy, safety and tolerability of AXA1125 in adult patients with biopsy-confirmed F2/F3 NASH. Approximately 270 patients will be enrolled and randomized 1:1:1 to receive either 45.2 or 67.8 grams per day of AXA1125 or a matched placebo in two divided doses for 48 weeks, with a four-week safety follow-up period. Patients will be stratified based on the presence or absence of type 2 diabetes.The Clinical Trial's primary endpoint will assess the proportion of patients with a biopsy-confirmed ?2 point improvement in their non-alcoholic fatty liver disease, or NAFLD, Activity Score (NAS) after the 48-week treatment period. Secondary endpoints will include the proportion of patients achieving biopsy-confirmed resolution of NASH without worsening of fibrosis and the proportion of patients achieving a ?1 stage improvement in fibrosis without worsening of NASH. 22
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Table of Contents Effects of COVID-19 Pandemic The extent to which COVID-19 impacts our business, operations or financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, new information that may emerge concerning the severity of COVID-19 or the nature or effectiveness of actions to contain COVID-19 or treat its impact, among others. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions. However, if we or any of the third parties with whom we engage were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on our business, results of operations and financial condition. Components of our Condensed Consolidated Results of Operations Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or we execute license or collaboration agreements with third parties, we may generate revenue in the future from product sales, payments from collaborations or license agreements that we may enter into with third parties, or any combination thereof. Research and Development Expenses Our research and development expenses consist primarily of costs incurred in connection with our research activities, including our drug discovery efforts, and the development of our product candidates, which include: •direct external research and development expenses, including fees, reimbursed materials and other costs paid to consultants, contractors, contract manufacturing organizations, or CMOs, and clinical research organizations, or CROs, in connection with our clinical and preclinical development and manufacturing activities; •employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research and development functions; •expenses incurred in connection with the preclinical and clinical development of our product candidates, including any Clinical Studies, Clinical Trials and other research programs, including under agreements with third parties, such as consultants, contractors and CROs; •the cost of developing and scaling our manufacturing process and manufacturing products for use in our preclinical studies, Clinical Studies and Clinical Trials, including under agreements with third parties, such as consultants, contractors and CMOs; •patent-related costs incurred in connection with filing and prosecuting patent applications; and •facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance. We expense research and development costs as incurred. We often contract with CROs and CMOs to facilitate, coordinate and perform agreed-upon research, design, development, and manufacturing of our product candidates. To ensure that research and development costs are expensed as incurred, we record monthly accruals for Clinical Studies, Clinical Trials and manufacturing costs based on the work performed under the contract. 23
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Table of Contents These CRO and CMO contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain clinical or manufacturing milestones. In the event that we prepay CRO or CMO fees, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development or manufacturing services are performed. Most professional fees, including project and clinical management, data management, monitoring and manufacturing fees are incurred throughout the contract period. These professional fees are expensed based on their estimated percentage of completion at a particular date. Our CRO and CMO contracts generally include pass through fees. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs and other miscellaneous costs and raw materials. We expense the costs of pass through fees under our CRO and CMO contracts as they are incurred, based on the best information available to us at the time. A significant portion of our research and development costs are not tracked by project as they benefit multiple projects or our technology platform, and, as such, are not separately classified. Research and development expenses may fluctuate from period to period depending upon the stage of certain projects and the stage of preclinical and clinical activities and development. Many factors can affect the cost and timing of our Clinical Studies and Clinical Trials, including, without limitation, slow patient enrollment and the availability of supplies, including as a result of the COVID-19 pandemic, and real or perceived lack of effect on biology or safety of our product candidates. In addition, the development of all of our product candidates may be subject to extensive governmental regulation. These factors make it difficult for us to predict the timing and costs of the further development of our product candidates. See "Risk Factors" for further discussion of these and additional risks and uncertainties associated with product development and commercialization that may significantly affect the timing and cost of our research and development expenses and our ability to obtain regulatory approval for and successfully commercialize our product candidates. We expect research and development expenses to increase as we advance existing product candidates into additional Clinical Trials and Clinical Studies and develop new product candidates. General and Administrative Expenses General and administrative expenses consist primarily of salaries, benefits, travel and stock-based compensation expense for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for legal, consulting, accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development of our product candidates. We also anticipate that we will incur increased finance, accounting, audit, legal, compliance, director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidate. Other Income (Expense), Net Other income (expense), net primarily consists of interest income and interest expense. Interest income consists of interest earned on our invested cash balances. Interest expense consists of interest on outstanding borrowings under our loan and security agreement, and the amortization expense of the debt discount and debt issuance costs. 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. 24
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Table of Contents Results of Operations Comparison of the Three Months EndedJune 30, 2021 and 2020 The following table summarizes our results of operations for the three months endedJune 30, 2021 and 2020 (in thousands): Three Months Ended June 30, 2021 2020 Change Operating expenses: Research and development$ 10,298 $ 8,565 $ 1,733 General and administrative 4,946 4,619 327 Total operating expenses 15,244 13,184 2,060 Loss from operations (15,244) (13,184) (2,060) Other income (expense): Other income (expense), net (691) (708) 17 Total other income (expense), net (691) (708) 17 Net loss$ (15,935) $ (13,892) $ (2,043)
Research and Development Expenses
The following table summarizes our research and development expenses incurred
during the three months ended
Three Months Ended June 30, 2021 2020 Change Salary and benefits-related$ 3,437 $ 4,142 $ (705)
Clinical research and outside services 5,729 3,249 2,480 Facility-related and other
1,132 1,174 (42)
Total research and development expenses
Salary and benefits-related costs decreased by
25
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Table of Contents General and Administrative Expenses The following table summarizes our general and administrative expenses incurred during the three months endedJune 30, 2021 and 2020 (in thousands): Three Months Ended June 30, 2021 2020 Change Salary and benefits-related$ 3,193 $ 2,856 $ 337 Other contract services and outside costs 1,464 1,317 147 Facility-related and other 289 446 (157)
Total general and administrative expenses
Salary and benefits-related costs increased by$0.3 million due to an increase in equity compensation related to additional grants issued and annual benefit-related increases. Other Income (Expense), Net Other income (expense), net was$0.7 million for both the three months endedJune 30, 2021 and the three months endedJune 30, 2020 . There were no material changes in Other income (expense), net as interest income and interest expense were comparable within each period. Comparison of the Six Months EndedJune 30, 2021 and 2020 The following table summarizes our results of operations for the six months endedJune 30, 2021 and 2020 (in thousands): Six Months Ended June 30, 2021 2020 Change Operating expenses: Research and development$ 20,538 $ 18,900 $ 1,638 General and administrative 9,202 8,744 458 Total operating expenses 29,740 27,644 2,096 Loss from operations (29,740) (27,644) (2,096) Other income (expense): Other income (expense), net (1,384) (1,257) (127)
Total other income (expense), net (1,384) (1,257) (127) Net loss
$ (31,124) $ (28,901) $ (2,223) 26
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Table of Contents Research and Development Expenses The following table summarizes our research and development expenses incurred during the six months endedJune 30, 2021 and 2020 (in thousands): Six Months Ended June 30, 2021 2020 Change Salary and benefits-related$ 6,789 $ 8,791 $ (2,002)
Clinical research and outside services 11,149 7,882 3,267 Facility-related and other
2,600 2,227 373
Total research and development expenses
Salary and benefits-related costs decreased by$2.0 million due to lower headcount. Clinical research and outside services costs increased by$3.3 million due to expenses for the initiation of our AXA1665 EMMPOWER Phase 2 Clinical Trial and AXA1125 EMMPACT Phase 2b Clinical Trial. Facility-related and other costs increased$0.4 million due to increases in infrastructure and scientific communications expenses. General and Administrative Expenses The following table summarizes our general and administrative expenses incurred during the six months endedJune 30, 2021 and 2020 (in thousands): Six Months Ended June 30, 2021 2020 Change Salary and benefits-related$ 5,857 $ 5,365 $ 492
Other contract services and outside costs 2,756 2,663 93 Facility-related and other
589 716 (127)
Total general and administrative expenses
Salary and benefits-related costs increased by$0.5 million due to an increase in equity compensation related to additional grants issued and annual benefit-related increases. Other Income (Expense), Net Other income (expense), net was$1.4 million for the six months endedJune 30, 2021 , compared to$1.3 million for the six months endedJune 30, 2020 . The increase was primarily driven by lower interest income as a result of declines in interest rates. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have not generated any revenue and have incurred significant operating losses and negative cash flows from our operations. Our net losses were$15.9 million and$13.9 million for the three months ended and$31.1 million and$28.9 million for the six months endedJune 30, 2021 and 2020, respectively. As ofJune 30, 2021 , we had an accumulated deficit of$303.7 million . We expect to incur net losses as we continue to develop our product candidates, and 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. 27
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Table of Contents To date, we have primarily financed our operations with proceeds from the sale of preferred and common stock and borrowing of debt, including the following recent significant transactions: •OnMay 18, 2020 , we completed a follow-on public offering pursuant to which we issued an aggregate of 12,650,000 shares of our common stock for net proceeds of approximately$55.9 million after deducting the underwriting discounts and commissions and other offering expenses. •OnJune 5, 2020 , we entered into a sales agreement withSVB Leerink LLC ("SVB Leerink") pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to$35.0 million from time to time throughSVB Leerink , acting as our agent (the "ATM Offering"). As ofJune 30, 2021 , we have sold an aggregate of 1,847,794 shares of common stock under the ATM Offering for net cash proceeds of$9.9 million after deducting commissions and expenses of$0.5 million . During the three months endedJune 30, 2021 , we issued 126,527 shares of our common stock in a series of sales under the ATM Offering for aggregate net proceeds of$0.6 million after deducting commissions and expenses of$0.1 million . As ofJune 30, 2021 , we had cash, cash equivalents and marketable securities of$78.9 million . Our cash equivalents and marketable securities as ofJune 30, 2021 consisted of bank deposits, money market funds that invest inU.S. treasury securities, and corporate obligations, which enables us to achieve our liquidity and capital needs. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented (in thousands): Six Months Ended June 30, 2021 2020 Cash used in operating activities$ (28,367) $ (29,049) Cash used in investing activities (9,954) (59) Cash provided by financing activities 671 58,381
Net (decrease) increase in cash and cash equivalents
Operating Activities During the six months endedJune 30, 2021 , operating activities used$28.4 million of cash, primarily resulting from a net loss of$31.1 million and changes in our operating assets and liabilities of$1.2 million , both partially offset by non-cash charges of$4.0 million , including$3.1 million of stock-based compensation. During the six months endedJune 30, 2020 , operating activities used$29.0 million of cash, primarily resulting from a net loss of$28.9 million and changes in our operating assets and liabilities of$4.2 million , both partially offset by non-cash charges of$4.1 million , including$3.6 million of stock-based compensation. Investing Activities During the six months endedJune 30, 2021 , net cash used in investing activities consisted of purchases of marketable securities and capital equipment, which were partially offset by maturities of marketable securities. During the six months endedJune 30, 2020 , net cash used in investing activities consisted of the purchase of capital equipment. 28
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Table of Contents Financing Activities During the six months endedJune 30, 2021 , net cash provided by financing activities consisted of net proceeds from the issuance of common stock, which were partially offset by payments for leased capital equipment. During the six months endedJune 30, 2020 , net cash provided by financing activities consisted of net proceeds from the issuance of common stock. Loan and Security Agreement AtJune 30, 2021 , we had$26.0 million in outstanding long-term debt pursuant to our loan and security agreement, of which$5.8 million is current. In accordance with the most recent amendment of the loan and security agreement, the interest-only period was extended throughApril 31, 2022 as we achieved all regulatory and clinical milestones. Monthly principal payments of$2.9 million will commenceMay 1, 2022 for 9 months as the loan matures onJanuary 1, 2023 . The terminal interest fee of 6.35%, or$1.7 million , is due with the final principal payment of the loan. We granted the lender a first priority security interest in all of our assets, excluding intellectual property and granted a negative pledge on such intellectual property. There are no financial covenants under our loan and security agreement; however, we adhere to non-financial covenants under our loan and security agreement. Funding Requirements We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance existing product candidates, AXA1125 and AXA1665, and develop new clinical and pre-clinical programs. 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 re-financings, collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all, including as a result of market volatility following the COVID-19 pandemic. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. 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. 29
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Table of Contents 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 withU.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 endedDecember 31, 2020 , which was filed with theSEC onMarch 17, 2021 . 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 applicableSEC rules and regulations. Recently Issued Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report. Emerging Growth Company Status We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and, as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than$1.07 billion in annual revenue, we have more than$700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than$1.0 billion of non-convertible debt securities over a three-year period. Item 3. Quantitative and Qualitative Disclosure About Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. 30
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