Eloxx Pharmaceuticals, Inc. 10-Q

Item 2. 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 in conjunction with our financial statements and the related notes included elsewhere in this Quarterly Report, as well as the audited consolidated financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Annual Report on Form 10-K for the fiscal years ended December 31, 2025, 2024, and 2023 (the “2025 Annual Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see the sections “Special Note Regarding Forward-Looking Statements,” “Summary Risk Factors,” and Part II, Item 1A. “Risk Factors” herein. Company Overview We are a clinical-stage biopharmaceutical company developing novel, small-molecule product candidates designed to modulate the ribosome and promote readthrough of premature stop codons induced by nonsense mutations (“NMs”) to enable the production of full-length proteins. Targeting ribosome subunits provides a therapeutic approach to addressing a number of genetic diseases. According to the Human Gene Mutation Database, NMs account for approximately 10% to 12% of patients with a given genetic disease. There are over 7,000 inherited genetic diseases that collectively affect 350 million people worldwide. Our immediate focus is to advance the clinical development of our product candidate, exaluren, for the treatment of rare kidney diseases. We have also exclusively licensed our product candidate, ZKN-013, to Almirall, S.A. (“Almirall”), who is developing it for the treatment of rare skin diseases. Between January 2023 and April 2024, we conducted a proof-of-concept Phase 2a open-label trial in the United Kingdom in three patients with autosomal recessive Alport Syndrome (“AS”) and a NM in the COL4A4 gene. The primary endpoint of this study was to assess the number of participants with adverse events associated with administration of exaluren. The secondary endpoints were change from baseline in proteinuria, measured by the urine protein-to-creatinine ratio (“UPCR”) in a patient’s urine samples, and hematuria, and change in baseline in Collagen IV expression. All three patients showed a reduction in podocyte foot process effacement (“FPE”), which is the flattening and loss of specialized kidney cell structures that form the filtration barrier and attach to the podocytes and glomerular basement membrane, in transmission electron microscopy (“TEM”) images. FPE is a hallmark of kidney diseases including AS and the severity of FPE has historically been associated with time to kidney failure. TEM images of biopsy samples also showed an improvement in the GBM width in all treated patients. FPE was also measured as a 50% increase in the filtration slit density (“FSD”). These results were consistent with exaluren’s proposed mechanism of functional full-length protein restoration as reflected by improvements in GBM architecture and FPE observed in kidney biopsies. At the end of treatment, UPCR had decreased for one patient and increased for two patients. We received clearance to proceed with a Phase 2b clinical trial for exaluren in NMAS patients (without kidney biopsies in U.S. pediatric patients) under an IND from the FDA and we plan to initiate this trial in the first half of 2026. We anticipate topline data from the initial 16-week placebo-controlled part of the study by mid-2027 with the final readout by the end of 2027. Our pipeline also includes a preclinical program evaluating exaluren for the treatment of autosomal dominant polycystic kidney disease (“ADPKD”) in patients that have NMs (“nmADPKD”). ADPKD is the most common monogenic kidney disease based on genetic diagnosis, affecting approximately 160,000 to 200,000 patients in the United States. The PKD1 gene encodes polycystin-1 (“PC1”) and the PKD2 gene encodes polycystin-2 (“PC2”), these are proteins that regulate cell growth and fluid secretion in kidney tubules. Loss of functional PC1 or PC2 protein leads to uncontrolled cyst formation. Approximately 26% of ADPKD patients have NMs in the PKD1 and PKD2 genes resulting in a prevalence of approximately 40,000 to 50,000 patients in the United States and over 90,000 in developed markets outside of the United States. Patients experience hypertension, kidney stones, urinary tract infections, heart valve abnormalities, hematuria and increased probability of aortic aneurysm. Formation of these cysts eventually leads to nephromegaly (kidney enlargement) and end-stage renal disease. The only approved therapy for ADPKD, tolvaptan, does not address the underlying genetic cause and carries significant tolerability limitations. Preclinical organoid and cellular models have shown increased PC1 and PC2 gene expression following treatment with exaluren. We plan to initiate enrollment in a Phase 2 trial of exaluren for the treatment of nmADPKD in 2027 following protocol finalization and clearance of an investigational New Drug application by the FDA. We anticipate topline data from this trial by mid-2028. We have also exclusively licensed ZKN-013, an oral ribosome modulating agent (“RMA”) with structural similarity to azithromycin that induces PTC readthrough to Almirall. In March 2024, we entered into an exclusive global rights agreement with Almirall (the “Almirall License Agreement”) for Almirall to develop and commercialize ZKN-013 for the use in all 20 indications. Through the Almirall License Agreement, Almirall is developing ZKN-013 for the treatment of recessive dystrophic epidermolysis bullosa (“RDEB”) and junctional epidermolysis bullosa (“JEB”) with NMs. RDEB and JEB are rare skin diseases characterized by mutations in the Collagen VII (RDEB) and LAMB3 (JEB) proteins. We estimate that there are approximately 4,000 patients with NMs in these diseases in the major markets of the United States, Japan and Western Europe. Patients with these diseases suffer from severe skin bruising, wounds and internal lesions resulting in increased risk of skin cancer and severe malnourishment. Under the Almirall License Agreement, we received an upfront payment of $3 million and a development milestone payment of $3 million in 2024. Almirall is responsible for development and commercialization of ZKN-013 and we are eligible to receive up to approximately $470.0 million in additional development, regulatory and commercial milestone payments as well as tiered royalties based on global sales. The agreement may be terminated under specified circumstances, including for convenience by Almirall, in which case rights may revert to us. Results of Operations The following table summarizes our results of operations for the periods presented (in thousands): Three Months Ended March 31, Change 2026 2025 $ % Operating expenses: Research and development $ 1,659 $ 510 $ 1,149 225 % General and administrative 2,136 712 1,424 200 % Total operating expenses 3,795 1,222 2,573 211 % Loss from operations (3,795 ) (1,222 ) 2,573 211 % Other (income) expense, net (41 ) 487 (528 ) (108 ) % Net loss $ (3,754 ) $ (1,709 ) $ 2,045 120 % Research and development expense Research and development expenses were $1.7 million for the three months ended March 31, 2026, compared to $0.5 million for the same period in 2025, an increase of $1.1 million. The increase was primarily related to an increase of $0.6 million in clinical trial expenses, a $0.3 million increase in expenses related to subcontractors, advisors, and laboratory supplies in connection with preclinical research and development activities, and an $0.2 million increase in salaries and other personnel costs. General and administrative expenses General and administrative expenses were $2.1 million for the three months ended March 31, 2026, compared to $0.7 million for the same period in 2025, an increase of $1.4 million. The increase was primarily related to a $1.1 million increase in expenses attributable to professional and consulting fees, including legal costs and audit and tax fees, and a $0.3 million increase in facility and other general and administrative overhead costs. Other (income) expense, net Other income, net, was less than $0.1 million for the three months ended March 31, 2026, compared to $0.5 million in other expense, net, for the same period in 2025, a change of $0.5 million. The change was primarily related to a decrease in interest expense of $0.4 million due to the majority of our outstanding debt being exchanged for pre-funded warrants in 2025 and a gain on extinguishment of accrued interest of $0.1 m illion due to a waiver of the accrued interest related to the $1.0 million exchange of outstanding debt by Domicilium during the three months ended March 31, 2026. Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. Our net losses were $3.8 million and $1.7 million for the three months ended March 31, 2026 and 2025, respectively. As of March 31, 2026, we had an accumulated deficit of $304.3 million. To date, we have financed our operations primarily through the sale of equity, license and collaboration agreements, debt securities and, to a lesser extent, grants. We have devoted substantially all of our financial resources and efforts to research and development. We expect that it may be several years, if ever, before we receive regulatory approval and have a product candidate ready for commercialization. We expect to continue to incur significant expenses and operating losses for the foreseeable future due to, among other things, costs related to research, development of our product candidates, conducting preclinical studies and clinical trials, and our administrative organization. A successful transition to profitable operations is dependent upon achieving a level of revenue adequate to support our cost structure. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses may increase if, and as, we: • advance exaluren and/or other product candidates further into clinical development; 21 • experience delays in enrollment and completion of our clinical trials; • fund preclinical development of our research programs and advance candidates into clinical trials; • pursue regulatory authorization to conduct clinical trials of additional product candidates; • seek marketing approvals for our product candidates; • establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we obtain marketing approval; • maintain, expand and protect our intellectual property portfolio; • hire additional clinical, regulatory, management and scientific personnel; • add operational, financial and management information systems and personnel; • acquire or in-license other product candidates and technologies; and • operate as a public company including costs associated with our planned uplisting to and maintaining Nasdaq compliance. We may never achieve profitability, and unless and until we do, we will continue to need to raise additional cash to fund our operations. We believe that our cash and cash equivalents of $6.4 million as of March 31, 2026 will not be sufficient to maintain our current and planned operations for at least the next twelve months following the filing of this Quarterly Report on Form 10-Q. We will need to raise additional capital to finance our operations, which cannot be assured. We have concluded that these conditions, in aggregate, raise substantial doubt about our ability to continue as a going concern for one year after the date these unaudited condensed consolidated financial statements are issued. Our independent registered public accounting firm, in its report on our consolidated financial statements for the year ended December 31, 2025, has also expressed substantial doubt about our ability to continue as a going concern. The unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared assuming we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. Management intends to fund future operations through private or public debt or equity financing transactions and may seek additional capital through arrangements with strategic partners or from other sources, including licensing arrangements. The availability of sufficient funding to alleviate the conditions that raise substantial doubt is not within management’s control and cannot be assessed as being probable of occurring. If we are unable to obtain adequate financing, we will evaluate options which may include curtailing expenses contemplated by our current operating plan, and we may be required to delay, limit, reduce or terminate our product development efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves, which may have a material adverse effect on our operations and future prospects. Financing Activities for the Three Months Ended March 31, 2026 and 2025 On February 20, 2026, the securities purchase agreement (the "Coastlands Securities Purchase Agreement") we had entered into with Coastlands Capital Partners LP ("Coastlands") on August 20, 2025, as amended on September 25, 2025 and December 11, 2025, was amended, and, on February 26, 2026, we received $5.0 million from Coastlands in return for a pre-funded warrant to purchase up to 10,204,081 shares of our common stock at an exercise price of $0.01 per share, based on a purchase price of $0.49 per share of underlying common stock. On February 26, 2026, SD MF 4, LLC, a Delaware limited liability company ("Domicilium") exchanged with us the remaining $1.0 million of our outstanding obligations under the Loan and Security Agreement with Hercules Capital, Inc. ("Hercules"), dated as of September 30, 2021 (the "Hercules Loan Agreement"), as amended, in connection with the Coastlands Third Tranche Closing, in return for a pre-funded warrant to purchase up to 2,040,816 shares of our common stock at an exercise price of $0.01 per share, based on a conversion price of $0.49 per share of underlying common stock. In addition, Domicilium agreed to waive any and all additional accrued and unpaid interest related to the remaining $1.0 million, which was less than $0.1 million as of February 26, 2026. As of February 26, 2026, we had no remaining outstanding debt obligations. On March 12, 2026, we received $2.0 million from Domicilium, in return for a pre-funded warrant to purchase up to 4,081,632 shares of our common stock at an exercise price of $0.01 per share, based on a purchase price of $0.49 per share of underlying common stock. During the three months ended March 31, 2025, we entered into a non-interest-bearing bridge loan with Domicilium for $0.4 million. The Company recorded interest expense of less than $0.1 million representing imputed interest for the 22 non-interest-bearing bridge loan during the three months ended March 31, 2025. The imputed interest of 13.75% was calculated using the sum of 6.25% plus the prime rate, as published in The Wall Street Journal. In addition, during the three months ended March 31, 2025, the Company repaid $0.3 million for the bridge loans that had been entered into with Domicilium in December 2024, including accrued interest, repaid $0.5 million related to Development and Launch Milestone Payments, in accordance with the terms of the Royalty and Revenue Sharing Agreement, as amended on March 2, 2026 (the “Royalty Agreement”) with Domicilium, and repaid $0.5 million in outstanding debt obligations to Hercules under the Hercules Loan 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, 2026 2025 Net cash (used in) provided by operating activities $ (5,453 ) $ 1,204 Net cash provided by (used in) financing activities 7,031 (865 ) Cash flows from operating activities Net cash used in operating activities was $5.5 million for the three months ended March 31, 2026, compared to net cash provided by operating activities of $1.2 million for the three months ended March 31, 2025. During the three months ended March 31, 2026, our net loss was $3.8 million and the change in working capital was $1.7 million. During the three months ended March 31, 2025, the change in working capital of $2.6 million and debt discount amortization of $0.2 million was partially offset by our net loss of $1.7 million. Cash flows from financing activities Net cash provided by financing activities was $7.0 million for the three months ended March 31, 2026, compared to net cash used in financing activities of $0.9 million for the three months ended March 31, 2025. For the three months ended March 31, 2026, net cash provided by financing activities consisted primarily of $7.0 million in net proceeds from the sale of pre-funded warrants in connection with the 2025 PIPE Financing transaction, net of issuance costs. For the three months ended March 31, 2025, net cash used in financing activities consisted primarily of repayments of term loan principal of $1.3 million, partially offset by $0.4 million in proceeds from debt financing obligations. Critical Accounting Policies and Significant Judgments and Estimates Our discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these interim unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as the expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with those described in our audited consolidated financial statements as of and for the years ended December 31, 2025, 2024, and 2023 and the notes thereto, in our 2025 Annual Report, except for the policy below. Stock-Based Compensation We account for stock-based compensation in accordance with ASC Topic 718, “Compensation-Stock Compensation” (“ASC 718”). We recognize compensation expenses for the value of our awards granted based on the straight-line method over the requisite service period of each of the awards or over the implicit service period when an award includes a performance condition, provided that achievement of the performance condition is considered probable of being achieved. We account for forfeitures as they occur. We grant stock options, restricted stock units (“RSUs”), and restricted stock awards (“RSAs”) to certain employees, 23 consultants and directors as part of our long-term incentive compensation program. Options are measured at fair value on the grant date using an option-pricing model, the most significant input for which has been the fair value of our common stock. RSU’s and RSAs are measured at fair value on the grant date, which is also determined based on the fair value of our common stock. The absence of an active market for our common stock has required the board of directors, the members of which we believe have extensive business, finance and venture capital experience, to determine the fair value of our common stock for purposes of granting stock-based awards and for calculating stock-based compensation expense for the periods presented. For equity-based grants made in 2024 and during the time we had sufficient trading volume in our common stock, our board of directors determined fair value of our common stock for purposes of stock-based compensation under ASC 718 using the trading price of our common stock on the applicable grant date. However, for equity-based grants made in 2025 and in the absence of an active market for our common stock, our board of directors determined the fair value of options, RSUs and RSAs granted with reference to contemporaneous third-party valuations prepared using the methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Because our common stock has had limited trading activity on the OTC Expert Market, for grants made during the year ended December 31, 2025 we used, among other things, input from a third-party valuation specialist to assist the board of directors in estimating the fair value of our common stock on a contemporaneous basis, and used that estimate to determine the grant-date fair value of equity awards. We determined the market approach was the most appropriate method for determining the fair value of our common stock based on our stage of development and other relevant factors. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business or security. The valuation reflected a market approach that tied to our most recent arm’s-length equity financing (the Coastlands Securities Purchase Agreement), this transaction represented an orderly market-based transaction with the purchase price in that financing used as an indicator of fair value (assuming consideration given to the implied call option embedded therein), as adjusted for discounts related to the lack of marketability and control associated with minority ownership. The significant assumptions used in applying the market approach are the appropriate discount for lack of marketability and control for a minority interest in a company without a liquid trading market, as well as the assumptions in the Black-Scholes option-pricing model, including the expected volatility, estimated by reference to the historical volatility of a peer group of publicly traded companies in our industry group; the risk-free interest rate, based on the U.S. Treasury yield curve for periods approximating the expected term of the award; and an expected dividend yield of zero, as we have never paid, and do not currently intend to pay, cash dividends. Changes in these assumptions, and changes in the underlying fair value of our common stock, could materially affect the fair value of future awards and the related compensation expense. Off-Balance Sheet Arrangements As of March 31, 2026 and December 31, 2025, we did not have any off-balance sheet arrangements, as such term is defined under Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 24 Item 3. Quantitative and Qualitati ve Disclosures about Market Risk Omitted as we are a “smaller reporting company”, as defined in Item 10(f)(1) of SEC Regulation S-K.