UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of November 2020

Commission File Number 001-38810

STEALTH BIOTHERAPEUTICS CORP

(Translation of registrant’s name into English)

Stealth BioTherapeutics Corp

c/o Intertrust Corporate Services (Cayman) Limited

190 Elgin Avenue, George Town

Grand Cayman

KY1-9005 Cayman Islands

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

FORM 20-F  ☒    FORM 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

INCORPORATION BY REFERENCE

This report on Form 6-K (this “Report”) shall be deemed to be incorporated by reference into the registration statements on Form S-8 (Registration Numbers 333-237541 and 333-230452), Form F-1 (Registration Number 333-239356) and Form F-3 (Registration Number 333-237542) of Stealth BioTherapeutics Corp (the “Company”) (including any prospectuses forming a part of such registration statements) and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.

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Presented below are selected consolidated financial data, management’s discussion and analysis of financial condition and results of operations, from the audited consolidated financial statements as of December 31, 2019 and the unaudited condensed consolidated financial statements as of September 30, 2020 and the unaudited condensed consolidated financial statements for the nine months ended September 30, 2019 and 2020 of Stealth BioTherapeutics Corp (the “Company”).

Forward-Looking Statements

Statements in this Report about future expectations, plans and prospects, as well as any other statements regarding matters that are not historical facts, may constitute “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements relating to the Company’s development funding agreement and the timing of payments thereunder. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements as a result of known and unknown risks, uncertainties and other important factors, including: the Company’s ability to obtain additional funding and to continue as a going concern; the impact of the COVID-19 pandemic; the ability to successfully demonstrate the efficacy and safety of the Company’s product candidates and future product candidates; the preclinical and clinical results for the Company’s product candidates, which may not support further development and marketing approval; the potential advantages of the Company’s product candidates; the content and timing of decisions made by the U.S. FDA, the EMA or other regulatory authorities, investigational review boards at clinical trial sites and publication review bodies, which may affect the initiation, timing and progress of preclinical studies and clinical trials of the Company’s product candidates; Company’s ability to obtain and maintain requisite regulatory approvals and to enroll patients in its planned clinical trials; unplanned cash requirements and expenditures; competitive factors; the Company’s ability to obtain, maintain and enforce patent and other intellectual property protection for any product candidates it is developing; and general economic and market conditions.  These and other risks are described in greater detail under the caption "Risk Factors" included in the Company’s most recent Annual Report on Form 20-F filed with the Securities and Exchange Commission ("SEC"), as well as in any future filings with the SEC. Any forward-looking statements contained in this Report speak only as of the date hereof, and the Company specifically disclaims any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

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SELECTED CONSOLIDATED FINANCIAL DATA

We have derived the following selected consolidated statement of operations data for the fiscal years ended December 31, 2017, 2018 and 2019 and the selected consolidated balance sheet data as of December 31, 2018 and 2019 from our audited consolidated financial statements included in our Annual Report on Form 20-F for the fiscal year ended December 31, 2019. The consolidated statements of operations data for the nine months ended September 30, 2019 and 2020 and the consolidated balance sheet data as of September 30, 2020 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this Report and have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that should be expected for any future period. The selected consolidated financial data set forth below should be read together with our consolidated financial statements and unaudited condensed consolidated financial statements and the related notes to those statements, as well as the section of this Report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes and other financial information included in our Annual Report on Form 20-F for the fiscal year ended December 31, 2019 or appearing elsewhere in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of our Annual Report on Form 20-F for the fiscal year ended December 31, 2019, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biotechnology company focused on the discovery, development and commercialization of novel therapies for diseases involving mitochondrial dysfunction. Mitochondria, found in nearly every cell in the body, are the body’s main source of energy production and are critical for normal organ function. Dysfunctional mitochondria characterize a number of rare genetic diseases and many common age-related diseases, leading to devastating ophthalmic, cardiac and neurological symptoms. We believe our product candidates have significant potential to treat the ophthalmic, cardiac and neurological symptoms of both rare genetic and common age-related mitochondrial diseases. Our mission is to be the leader in mitochondrial medicine, and we have assembled a highly experienced management team, board of directors and group of scientific advisors to help us achieve this mission. Our leadership team has decades of experience leading drug discovery and development programs, including at GlaxoSmithKline, Novo Nordisk, Lilly and Sanofi Genzyme.

Our first clinical product candidate, elamipretide, is a small peptide that targets and binds reversibly to cardiolipin, an essential structural element of mitochondria, stabilizing the inner mitochondrial membrane under conditions of oxidative stress. This novel mechanism of action has shown potential clinical benefit in both rare genetic and common age-related ophthalmic and cardiac diseases entailing mitochondrial dysfunction. Elamipretide has been generally well tolerated in clinical trials with over 1,000 subjects exposed to it systemically to date.

We are studying elamipretide in the following ophthalmic and cardiac disease indications:

Our Phase 2b trial for GA is now approximately 90% enrolled, with complete enrollment targeted for year-end 2020; we may choose to upsize the trial which could extend enrollment into the first quarter of 2021. We expect data from this trial in early 2022.  

We have met with the U.S. Food and Drug Administration, or FDA, to discuss a potential new drug application, or NDA, submission for Barth. The FDA did not agree that the current data package is sufficient to support an NDA submission and recommended that we collect additional controlled clinical data in this indication prior to an NDA submission.  However, following receipt of a petition signed by over 4,250 members of the Barth community requesting us to submit our new drug application, or NDA, we plan to submit our NDA on the basis of our existing data.  We also plan to submit a protocol contemplating the randomized withdrawal of the subjects remaining on open-label extension in our Phase 2/3 Barth trial and a protocol for a randomized, controlled Phase 4 post-marketing trial to assess whether elamipretide can reduce the occurrence of material adverse cardiac events in Barth. We hope to initiate the randomized withdrawal study in early 2021 following a potential NDA submission by the end of 2020.

We are evaluating the potential for additional clinical trials of elamipretide in the following ophthalmic, cardiac, and mitochondrial disease indications:

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We plan to support an investigator-initiated Phase 2a open-label clinical trial of elamipretide assessing both visual and cardiac endpoints in FRDA, which is anticipated to commence enrollment in early 2021, and we hope that results from this trial will help inform a pivotal trial design. We may initiate a Phase 3 global clinical trial for elamipretide in LHON, subject to ongoing formulation studies expected to read out in early 2022, continued planning efforts, and financing plans. Subject to discussions with the FDA, continued planning efforts and financing plans, we hope to initiate a clinical development program for elamipretide in DMD patients with cardiomyopathy during the second half of 2021, focusing primarily on cardiac endpoints. We also hope to initiate a pivotal trial for elamipretide in patients with mitochondrial replisome-related disorders during the second half of 2021, subject to discussions with the FDA, continued planning efforts and financing plans; these subjects were among a subgroup of patients with nuclear DNA mutations in whom improvements were observed in our Phase 3 primary mitochondrial myopathy trial.

Our second clinical product candidate, SBT-272, is a novel peptidomimetic that has been shown to increase adenosine triphosphate, or ATP, production and decrease levels of reactive oxygen species, or ROS, in dysfunctional mitochondria in preclinical studies. In early experiments, SBT-272 demonstrated higher mitochondrial uptake, greater concentrations in the brain, and improved oral bioavailability relative to elamipretide. We are developing SBT-272 for rare neurological diseases involving mitochondrial dysfunction. Preliminary results from a Phase 1 clinical trial in healthy human volunteers completed during 2020 suggest that SBT-272 showed a favorable safety profile. We are evaluating drug exposure to inform formulation plans and may also explore subcutaneous dosing. We plan to commence long-term toxicology studies to support chronic dosing during 2021.  We have also conducted and continue to conduct preclinical studies in neurological disease models to inform our decisions regarding our first Phase 2 indication.  

We have discovered and own over 100 compounds, including SBT-272 and the SBT-550 family, that also target the mitochondria and form the basis of our broad proprietary pipeline of mitochondrial-targeted product candidates. We are evaluating compounds in the SBT-550 family for rare neurological indications. In addition, our internal discovery platform has generated a library of over 100 differentiated proprietary compounds which could have clinical benefit for diseases related to mitochondrial dysfunction and from which we plan to designate potential product candidates. We may also utilize certain of these compounds as part of our carrier platform, in which they could potentially serve as scaffolds to deliver other beneficial compounds to the mitochondria.

In January 2020, we adopted a strategic organizational restructuring plan, and reduced workforce by approximately 60% of our personnel. In connection with the reduction in workforce, we incurred a one-time charge totaling approximately $2.3 million related to termination benefits and other related charges in the first quarter of 2020.

Since our inception in 2006, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing our proprietary technology, identifying potential product candidates and conducting preclinical and clinical studies of our product candidates. We have not generated any product revenue and have financed our operations primarily through the private placement of Series A convertible preferred shares and convertible notes, borrowings under a term loan, and through our February 2019 initial public offering, or IPO. As of September 30, 2020, we have raised an aggregate of $528.4 million in gross proceeds from the sale of Series A convertible preferred shares, the issuance of convertible promissory notes, a term loan, the sale and issuance of ADSs in our IPO and the sale of ordinary shares, as well as gross proceeds received from Alexion Pharmaceuticals, Inc., or Alexion. In October 2019, we entered into an option agreement, or the Agreement, and the share purchase agreement, or the Equity Agreement (collectively referred to as the Alexion Arrangement), with Alexion. Alexion terminated the Agreement in January 2020 and, as such, no there will be no further payments under the Alexion Arrangement. As of September 30, 2020, our principal source of liquidity was cash and cash equivalents, which totaled $19.9 million.

In October 2020, we entered into a Development Funding Agreement with Morningside Ventures (I) Investment Limited, or Morningside, pursuant to which we received initial cash proceeds of $20.0 million.

As of September 30, 2020, we had an accumulated deficit of $537.1 million. Our net loss was $82.9 million, $96.7 million and $71.7 million for the years ended December 31, 2017, 2018 and 2019, respectively, and $39.1 million for the nine months ended September 30, 2020. We have incurred significant net operating losses in every year since our inception and expect to continue to incur increasing net operating losses and significant expenses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly as we:

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We do not expect to generate revenues from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which is subject to significant uncertainty. We currently use contract research organizations, or CROs, and contract manufacturing organizations, or CMOs, to carry out our preclinical and clinical development activities, and we do not yet have a commercial organization. If we obtain regulatory approval for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we may seek to fund our operations through public or private equity or debt financings or other sources, including strategic collaborations. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, if at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current product candidates, or any additional product candidates, if developed. Without giving effect to any potential additional funding or milestone payments under the Development Funding Agreement, we expect that our existing cash as of September 30, 2020 along with the proceeds received in October 2020 from Morningside of $20.0 million under the Development Funding Agreement will be sufficient to fund our operating expenses and capital expenditure requirements through the second quarter of 2021. Beyond that point, we will need to raise additional capital to finance our operations, which cannot be assured. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern within one year after the issuance date of our consolidated financial statements for the nine months ended September 30, 2020. See Note 1 to our unaudited interim condensed consolidated financial statements appearing elsewhere in this Report for additional information on our assessment.

Financial Overview

Revenue

We have not generated any revenue from product sales and do not expect to do so in the near future. We expect that any revenue will be less than our expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. Our ability to generate revenues for any product candidate for which we receive regulatory approval will depend on numerous factors, including competition, commercial manufacturing capability and market acceptance of our products.

Our revenue to date was generated from the Alexion Arrangement. We received a non-refundable upfront payment of $15.0 million under the terms of the Agreement and $15.0 million under the Equity Agreement with Alexion. We recognized revenue as it relates to the Alexion Arrangement under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, or ASC 606.  In accordance with ASC 606, the Agreement and the Equity Agreement were deemed to be one arrangement, and any premium paid on the Equity Agreement was deemed to be included in the transaction price and allocated to the performance obligation identified. Alexion terminated the Agreement in January 2020 and as such, no additional revenue will be recognized under the Alexion Arrangement.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including development of our preclinical and clinical product candidates, which include:

We expense research and development costs as incurred. We recognize costs for certain development activities, such as preclinical studies and clinical trials, based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors such as patient enrollment or clinical site activations for services received and efforts expended.

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Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our current development programs progress and new programs are added.

We track certain external research and development expenses for our lead product candidates. We manage certain activities, such as contract research and manufacturing of our product candidates and our discovery programs, through our third-party vendors and have captured the costs of these activities on an individual product basis from our financial records. We use our employee, consultant and infrastructure resources across our development programs and do not track and do not allocate the cost of these activities on a program-by-program basis. The following summarizes our research and development expenses:

Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of the current or future preclinical studies and clinical trials or if, when, or to what extent we will generate revenues from the commercialization and sale of our product candidates. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, including:

A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development.

General and Administrative Expenses

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and share-based compensation for personnel in executive, finance, pre-commercial, facility operations and administrative functions.

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Significant costs are incurred in our pre-commercial activities including market research, public relations, patient advocacy, advisory boards and conferences and professional consulting. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to intellectual property and patent prosecution and maintenance, other legal fees and fees for accounting, tax and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs of operating as a public company. These increases will likely include costs related to the hiring of additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. We expect the increased costs associated with being a public company to include expenses related to services associated with maintaining compliance with the requirements of Nasdaq and the SEC, director and officer insurance and investor and public relations costs

Other Expense, Net

Other expense, net, primarily consists of amortization of debt discount and interest expense incurred on convertible notes payable and incurred on our term loan facility, interest income earned on a shareholder demand note receivable and on cash and cash equivalents and changes in the fair value of our derivative liability as well as our warrant liability.

Research and Development Expenses

Research and development expenses decreased by $10.1 million to $23.4 million for the nine months ended September 30, 2020 from $33.5 million for the nine months ended September 30, 2019. The decrease was primarily due to a $7.1 million net decrease in employee and consultant related costs attributable to the strategic repositioning we implemented in the first quarter of 2020, a $2.7 million decrease in contract manufacturing, a $0.8 million  decrease in discovery related expenses and $0.4 million decrease in regulatory and other costs, offset in part by a $0.9 million increase in clinical costs due to the increased activity in the ReCLAIM 2 trial.

General and Administrative Expenses

General and administrative expenses decreased by $2.1 million to $14.4 million for the nine months ended September 30, 2020 from $16.5 million for the nine months ended September 30, 2019. The decrease in administrative expenses was primarily attributable to a net $3.1 million decrease in pre-commercial activities, offset in part by an increase of $1.0 million in professional services and activities attributable to the cost of various financing transactions and an increased cost of insurance.

Other Expense

Other expense decreased by $24.2 million to $1.3 million for the nine months ended September 30, 2020 from $25.5 million for the nine months ended September 30, 2019.The decrease in other expense is primarily attributed to a non-cash $22.7 million loss on extinguishment of debt associated with the conversion of convertible notes into ordinary shares in connection with our 2019 IPO, a $4.6 million decrease in interest expense related to the convertible debt and a $0.3 million change in fair value of warrant liability. These decreases were offset in part by a $2.8 million change in fair value gain on the derivative liability associated with the convertible debt and a $0.6 million decrease in interest income.

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Revenue

Revenue was $21.1 million in 2019, compared to $0 in 2018.  Revenue represents non-refundable upfront payments under the Alexion Arrangement that were recognized in full in accordance with ASC 606 as we completed our performance obligation in 2019. Alexion terminated the Agreement in January 2020 and, as such, no additional revenue will be recognized under the Alexion Arrangement.

Research and Development Expenses

Research and development expenses decreased by $8.5 million to $44.6 million for the year ended December 31, 2019, from $53.1 million for the year ended December 31, 2018. This decrease was primarily from a net decrease of $8.5 million in clinical trial costs due to the timing of trials that ended in 2018, a $2.8 million decrease in contract manufacturing, and a $0.9 million decrease in discovery related expenses due to timing of activities. These decreases were offset in part by increases of $3.6 million in employee and consultant related expenses driven by continued build-out of clinical, medical affairs and regulatory functions and $0.1 million in other costs.

General and Administrative Expenses

General and administrative expenses increased by $0.1 million to $22.3 million for the year ended December 31, 2019, from $22.2 million for the year ended December 31, 2018. The increase in administrative expenses was primarily attributable to an increase of $3.3 million in employee related costs, a $2.3 million net increase in pre-commercial activities including building market disease awareness, and a $1.7 million increase in professional services for activities attributable to operating as a public company, offset by a decrease of $6.7 million in costs associated with our 2018 financing efforts and a decrease in legal intellectual property costs of $0.5 million.

Other Expense

Other expense increased by $4.5 million to $25.9 million for the year ended December 31, 2019 from $21.4 million for the year ended December 31, 2018. The increase in other expense is primarily attributable to a $22.7 million loss on extinguishment of debt recorded in conjunction with the IPO and a $0.7 million change period over period in the fair value adjustments of the warrant liability. These increases were offset by a $3.4 million change in period over period fair value adjustments of the derivative liability associated with the convertible debt, a decrease in interest expense of $14.7 million  mostly related to the convertible debt and an increase in interest income of $0.8 million.

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Comparison of the Years Ended December 31, 2017 and 2018

A discussion of our results of operations for the years ended December 31, 2017 and 2018 may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Comparison of the Years Ended December 31, 2019, 2018 and 2017” in our Annual Report on Form 20-F for the fiscal year ended December 31, 2019.

Liquidity and Capital Resources

Overview

We have funded our operations from inception through September 30, 2020 primarily through aggregate gross proceeds of $528.4 million from the sale of Series A convertible preferred shares, the issuance of convertible promissory notes, a term loan, the sale and issuance of ADSs in our IPO and sale of ordinary shares, as well as gross proceeds received from Alexion. As of September 30, 2020, we had cash and cash equivalents of $19.9 million. In October 2020, we entered into a Development Funding Agreement with Morningside, pursuant to which we received initial cash proceeds of $20.0 million.

Indebtedness

Term Loan Facility. On June 30, 2017, we entered into a loan and security agreement with Hercules Capital, Inc., or Hercules, which we refer to as the Term Loan Facility. The Term Loan Facility was amended in March, July and October of 2018 and March and October of 2019 and July 2020. We have borrowed an aggregated principal amount of $20.0 million as of September 30, 2020.

Borrowings under the Term Loan Facility bear interest at a floating per annum rate equal to the greater of (i) the Wall Street Journal prime rate plus 5.50% or (ii) 9.50%. In an event of default, as defined in the loan and security agreement, the interest rate applicable to borrowings under such agreement will be increased by 4.0%. Interest payments are due monthly in arrears. Under the Term Loan Facility, as amended, we make interest only payments through February 1, 2021, at which time payments are made in monthly installments of principal and interest, continuing through the scheduled maturity date of July 1, 2021.

We may voluntarily prepay all, but not less than all, of the outstanding principal at any time prior to the maturity date, subject to a prepayment fee, of 0.5% of the outstanding principal at the time the prepayment is made. The end of term charge of $1.3 million is due upon the earlier to occur of the maturity of the loan, the acceleration or prepayment of all outstanding principal, the termination of the Term Loan Facility or January 1, 2021. An additional end of term charge of $0.2 million is due upon the earlier to occur of the maturity of the loan, the acceleration or prepayment of all outstanding principal, or the termination of the Term Loan Facility.

Borrowings under the Term Loan Facility are secured by a first priority lien on all of our assets, excluding our intellectual property. We have agreed to a negative pledge on our intellectual property. The Term Loan Facility contains customary events of default and affirmative and negative covenants, including restrictions on our ability to pay dividends and incur additional debt, but does not contain any financial covenants. An event of default had not occurred as of September 30, 2020.

In connection with our entry into the Term Loan Facility, we issued to Hercules a warrant to purchase our ordinary shares. See “Description of Share Capital and Articles of Association—Warrant” in our prospectus dated February 14, 2019, filed with the SEC pursuant to Rule 424(b), for a description of the warrant.

Lincoln Park Agreement.  In June 2020, we entered into a $20.0 million purchase agreement, or the LPC Purchase Agreement, together with a registration rights agreement, with Lincoln Park Capital Fund, LLC, or Lincoln Park. Under the terms and subject to the conditions of the Purchase Agreement, we have the right to sell to Lincoln Park, and Lincoln Park is obligated to purchase, up to $20.0 million of our ordinary shares, subject to certain limitations, from time to time, over the 36-month period commencing on June 22, 2020.  During the nine months ended September 30, 2020, pursuant to the LPC Purchase Agreement a total of 4,680,000 ordinary shares were sold to Lincoln Park for net proceeds totaling $0.7 million.

ATM Offering Agreement.  In August 2020, we and H.C. Wainwright & Co., LLC, or Wainwright, entered into an At The Market Offering Agreement, or the ATM Offering Agreement, pursuant to which we may offer and sell, from time to time, through Wainwright, ADSs, each representing 12 ordinary shares. We have no obligation to sell any ADSs pursuant to the ATM Offering Agreement and may at any time suspend sales pursuant to the agreement. Each party may terminate the ATM Offering Agreement at any time without liability. As of September 30, 2020 we have not sold any shares under the ATM Offering Agreement.

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Development Funding Agreement. In October 2020, we entered into a Development Funding Agreement with Morningside under which Morningside agreed to provide us funding to support our efforts to secure regulatory approval for elamipretide and to develop elamipretide for the treatment of Barth, GA, FRDA, Duchenne cardiomyopathy, replisome-related disorders and LHON. We received initial cash proceeds of $20.0 million pursuant to the Development Funding Agreement, and we may receive up to an additional $15.0 million upon the completion of certain near term milestones. We may agree to add additional investors to the Development Funding Agreement, subject to the prior written consent of Morningside, on the same terms and subject to the same conditions as Morningside’s initial commitments.  

Cash Flows

The following table provides information regarding our cash flows for each of the periods presented:

Net Cash Used in Operating Activities

The use of cash for operating activities in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.

Net cash used in operating activities decreased by $9.5 million to $43.8 million during the nine months ended September 30, 2020 from $53.3 million during the nine months ended September 30, 2019. Cash used in operating activities during the nine months ended September 30, 2020 consisted of our net loss of $39.1 million, partially offset by non-cash charges of $3.8 million which includes, $3.1 million in share-based compensation, $0.2 million in amortization of the debt discount, $0.3 million in non-cash interest expense and $0.2 million in depreciation and amortization. Changes in operating assets and liabilities included $8.4 million in decreases in accounts payable, accrued expenses and other current liabilities and a $0.1 million increase in prepaid expenses and other current assets. Cash used in operating activities during the nine months ended September 30, 2019 consisted of our net loss of $75.5 million, partially offset by non-cash charges of $27.3 million which includes $22.7 million in loss on extinguishment of 2018 Notes, $2.9 million in amortization of the debt discount, $2.3 million in share-based compensation, $1.7 million in non-cash interest expense and $0.5 million in other non-cash charges, offset by a $2.8 million change in fair value of derivative liability. Changes in operating assets and liabilities included $6.1 million in decreases in accounts payable, accrued expenses and other current liabilities and a $0.9 million decrease in prepaid expenses and other current assets.

Net cash used in operating activities decreased by $24.1 million to $48.0 million during the year ended December 31, 2019, from $72.1 million year ended December 31, 2018. Cash used in operating activities during the year ended December 31, 2019, consisted of our net loss of $71.7 million, partially offset by non-cash charges of $27.3 million, which includes $22.7 million loss on extinguishment of 2018 Notes, $3.2 million in share-based compensation, $3.0 million in amortization of the debt discount, $1.7 million in non-cash interest expense and $0.6 million in other non-cash charges, offset by a $2.8 million change in fair value of derivative liability. Changes in operating assets and liabilities included $5.9 million in decreases in accounts payable, accrued expenses and other current liabilities and a $1.2 million increase in prepaid expenses and other current assets.

Net Cash Used in Investing Activities

Net cash used in investing activities was $40,000 during the nine months ended September 30, 2020 and $0.1 million as of September 30, 2019.

Net cash used in investing activities was $0.1 million during the year ended December 31, 2019 and $12,000 during the year ended December 31, 2018.

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Net Cash Provided by Financing Activities

Net cash provided by financing activities was $13.0 million during the nine months ended September 30, 2020, compared to $79.8 million during the nine months ended September 30, 2019. Cash provided by financing activities during the nine months ended September 30, 2020 was primarily attributable to the receipt of $20.7 million in connection with the issuance of ordinary shares, offset in part by $7.5 million of payments made on the Term Loan Facility and $0.2 million of payments for deferred financing costs.

Net cash provided by financing activities was $88.0 million during the year ended December 31, 2019, compared to $78.8 million during the year ended December 31, 2018. Cash provided by financing activities during the year ended December 31, 2019, was primarily attributable to the receipt of $78.2 million in connection with the issuance of ordinary shares in the IPO, $8.9 million in connection with the issuance of ordinary shares, $5.0 million in connection with the issuance of convertible promissory notes to a shareholder, offset in part by $2.8 million of payments made on the Term Loan Facility, $1.3 million of payments for deferred financing costs and $0.1 million related payments of debt issuance costs.

Funding Requirements

We expect our expenses to increase in connection with our ongoing clinical activities, particularly as we continue to develop and conduct clinical trials with respect to elamipretide and new compounds, including our ongoing and planned clinical trials; advance the development of pipeline programs; initiate new research and preclinical development efforts; and seek marketing approval for any product candidates that we successfully develop. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to establishing sales, marketing, distribution and other commercial infrastructure to commercialize such products. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

Without giving effect to any potential additional funding or milestone payments under the Development Funding Agreement, we expect that our existing cash as of September 30, 2020 along with the proceeds received in October 2020 from Morningside of $20.0 million under the Development Funding Agreement will be sufficient to fund our operating expenses and capital expenditure requirements through the second quarter of 2021. Our capital expenditures for the nine months ended September 30, 2020 and for the years ended December 31, 2019 and 2018 amounted to $0.02 million, $0.13 million and $0.01 million, respectively. In the three-year period ended September 30, 2020, we have invested a total of $0.16 million in equipment and facilities.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the research, development and commercialization of our product candidates, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on many factors, including:

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many 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

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commercial success. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Until such time, if ever, that we can generate substantial revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of ADSs. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise funds through future collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future financial performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and we could have used different estimates which also would have been reasonable. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Report, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Accrued Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed for us and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of subjects and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. To date, there have been no material differences from our estimates to the amounts actually incurred.

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We enter into contracts in the normal course of business with CROs and clinical sites for the conduct of clinical trials, professional consultants and other vendors for clinical supply, manufacturing or other services. These contracts are not included in the table above as they provide for termination on notice and, therefore, are cancelable contracts and do not include any minimum purchase commitments.

We have entered into several license agreements with Cornell Research Foundation, Inc., a subsidiary of Cornell University, or Cornell, and Institut de recherches cliniques de Montréal, or the IRCM, pursuant to which Cornell and IRCM granted us an exclusive, worldwide rights under patents related to elamipretide, SBT-20 and other technology. In connection with the licenses granted under the original Cornell agreement, we issued Cornell 666,667 ordinary shares. With respect to the other Cornell license agreements, we paid Cornell upfront license fees of $60,000 and are obligated to pay Cornell royalties on net sales, if any, by us and our sublicensees of any licensed product. Subject to specified reductions and royalty offsets, such royalties are calculated as a tiered, low-to-mid single digit percentage of net sales of licensed products under each of the Cornell license agreements, except that for licensed products under the original Cornell agreement, such royalties are calculated as a tiered, low single-digit to sub-teen double-digit percentage of net sales, depending on patent coverage, amount of net sales and type of licensed product. Our obligation to pay royalties as to any licensed product extends until the later of the expiration of the last-to-expire valid claim of any licensed patent covering such licensed product or 15 years after the date of our first commercial sale of such licensed product. If a licensed product is covered by licenses granted under the original Cornell agreement and another Cornell license agreement, then, for each unit of product, royalties will only be due under the original Cornell agreement.

We are obligated to pay Cornell a low double-digit percentage of specified payments we receive in connection with granting a sublicense under the Cornell license agreements. We have also agreed to reimburse Cornell for its out-of-pocket expenses incurred in preparing, filing, prosecuting and maintaining the licensed patents, except for any licensed patents as to which we elect to waive our licensed rights. We also have agreed to pay Cornell annual license maintenance fees in dollars in the mid-five-digits for the original Cornell agreement, and mid-four-digits for each of the other Cornell license agreements starting on the date specified in each such agreement, in all cases until the first commercial sale of a specified type of licensed product under such agreement.

Off-balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the applicable regulations of the SEC.

Recent Accounting Pronouncements

Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to the consolidated financial statements includes a discussion of recent accounting pronouncements. There were no new accounting pronouncements adopted during 2020 that had a material effect on our consolidated financial statements.

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Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies. As a result, our financial statements may not be comparable to the financial statements of reporting companies that are required to comply with the effective dates for new or revised accounting standards that are otherwise applicable to public companies.

Qualitative and Quantitative Disclosures about Market Risk

We are minimally exposed to market risk related to changes in interest rates. As of September 30, 2020, we had cash and cash equivalents of $19.9 million, consisting primarily of U.S. Treasury funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our cash equivalents are held in short-term treasury funds. We do not believe we are materially at risk to sudden drops in interest rates based on the amounts subject to these potential changes.

Our Term Loan Facility has a floating per annum rate equal to the greater of (i) the Wall Street Journal prime rate plus 5.50% or (ii) 9.50%, which exposes us to market interest rate risk when we have outstanding borrowings. As of September 30, 2020, we had $9.0 million of outstanding borrowings under the Term Loan Facility. Assuming our outstanding debt remains constant for an entire year and the applicable annual interest rate increases or decreases by 1%, our annual interest expense would increase or decrease by $0.1 million.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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See the accompanying notes to these unaudited condensed consolidated financial statements.

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STEALTH BIOTHERAPEUTICS CORP

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except share and per share amounts)

See the accompanying notes to these unaudited condensed consolidated financial statements.

18

See the accompanying notes to these unaudited condensed consolidated financial statements.

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STEALTH BIOTHERAPEUTICS CORP

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

See the accompanying notes to these unaudited condensed consolidated financial statements.

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STEALTH BIOTHERAPEUTICS CORP